Royal Company manufactures 23,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:
|
|
| Direct materials |
$ |
5.30 |
| Direct labor |
|
8.00 |
| Variable manufacturing overhead |
|
3.30 |
| Fixed manufacturing overhead |
|
12.00 |
|
|
|
| Total cost per part |
$ |
28.60 |
|
|
|
|
|
An outside supplier has offered to sell 23,000 units of part R-3 each year to Royal Company for $25.60 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $102,000. However, Royal Company has determined that $8 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
|
| a. |
What is the total relevant cost of making the product?
|
| Total relevant cost of making the product (23,000 units) |
$ |
| b. |
What is the total relevant cost of buying the product? |
| Total relevant cost of buying the product (23,000 units) |
$ |
| c. |
What is the opportunity cost of making instead of buying? |
| d. |
How much profits will increase or decrease if the outside supplier's offer is accepted? (Input the amount as a positive value.)
|
| Profits would (Click to select)decreaseincrease by |
$ |