Peluso Company, a manufacturer of snowmobiles,is operating at70 plant manager is

Question

Peluso Company, a manufacturer of snowmobiles,is operating at70 plant manager is considering making the headlights now being supplier for $22 each. The Peluso plant headlights. The design engineer estimates that each headlight requires the following: $8.00 of direct materials, $6.00 of direct labor, and $12.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by th decision. REQUIRED: Calculate the relevant costs to make each headlight.

Explanation / Answer

Idle Capacity = 30% (100-70%)

Price quoted by outside supplier =$22

Production Cost

Note: Only Variable cost is to be considered because fixed cost are considered irrelevant/sunk cost are not considered for calculating relevant cost

Peluso company should manufacture headlights as relevant cost is less than purchase price

Type Cost($) Direct Material $       8.00 Direct Labor $       6.00 Manufacturing Overhead(Variable) $       7.20 Relevant Cost $    21.20

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