Question

Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision option is chosen. The following per-unit cost information to make the part by Kingston is available: Direct materials $ 15 Direct labor 60 Variable overhead 30 Fixed overhead applied 38 $ 143 Cost to buy the part from Utica Company $ 63 In deciding whether to make or buy the part, Kingston's total relevant cost to make the part would be:

Answer 1

Direct materials = $15

Direct labor = $60

Variable overhead = $30

Fixed overhead = $38

60% of the fixed overhead will continue even if the part is bought from the outside supplier. Hence, 60% of fixed overhead is unavoidable.

Avoidable fixed overhead = 40% of fixed overhead

= 38 x 40%

= $15.2

Total relevant cost of making = Direct materials+ Direct labor + Variable overhead + Avoidable fixed overhead

= 15+60+30+15.2

= $120.20

Unavoidable fixed overhead is an irrelevant cost.

Kingston's total relevant cost to make the part would be:$120.20