Question

Rockford company manufactures a part for use in its production of hats. when 10,000 items are produces, the costs per unit are:

Direct materials $0.75

Direct manufacturing labor 3.00

Variable Manufacturing overhead 1.50

Fixed Manufacturing overhead  1.60

Total: $6.85

Angel company has offered to sell to rockford company 10,000 units of the part for $6.00 per unit. the plant facilities could be used to manufacture another item at a savings of $9,000 if rockford accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.

Required:

a. What is the relevant per unit cost for the original part?

b. Which alternative is best for rockford company? By how much?

Answer 1

a. What is the relevant per unit cost for the original part

Direct materials	0.75
Direct manufacturing labor	3
Variable manufacturing overhead	1.5
Avoidable fixed manufacturing. Overhead	1
Total relevant per unit costs	6.25

b. Which alternative is best for Rockford company? By how much?

	Make	Buy	Effect of Buying
Purchase price		60000	-60000
Savings in space		-9000	9000
Direct materials	7500		7500
Direct manufacturing labor	30000		30000
Variable manufacturing overhead	15000		15000
Fixed overhead saved		-10000	10000
Total	52500	41000	11500

So company should buy the product instead of making it.