Revved Up Toys manufactures a computer chip used in the production of remote control cars. When 6,000 cars are produced, the costs per part are:
Direct materials $2.50
Direct labor 1.50
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 1.75
Total $6.75
Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Revved Up Toys accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated.
a. What is the relevant per unit cost to manufacture the part?
b. Which alternative is best for Revved Up Toys and by how much?
a. Relevant costs to manufacture the part include direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead that can be eliminated, or:
Direct materials $2.50
Direct labor $1.50
Variable manufacturing overhead $1.00
Traceable fixed cost per unit $1.00
Relevant cost to produce each unit $6.00
b.
Direct materials $2.50
Direct labor $1.50
Variable manufacturing overhead $1.00
Traceable fixed cost per unit $1.00
Relevant cost to produce each unit $6.00
Offer price by supplier $(5.75)
Savings per unit if bought $0.25
Production level 6,000
Total increase in operating income if bought $1,500
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