Question

Every year Pronghorn Industries manufactures 5,800 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Direct materials		$ 5
Direct labor		12
Variable manufacturing overhead		6
Fixed manufacturing overhead		10
Total		$33

Flintrock, Inc., has offered to sell 5,800 units of part 231 to Pronghorn for $32 per unit. If Pronghorn accepts Flintrock’s offer, its freed-up facilities could be used to earn $13,200 in contribution margin by manufacturing part 240. In addition, Pronghorn would eliminate 40% of the fixed overhead applied to part 231.

(a) Calculate total relevant cost to make and net cost to buy.

Total relevant cost to make
Net relevant cost to buy

Answer 1

calculate total relevant cost to make

Cost	per unit cost	total cost
Direct material	$5
Direct labour	$12
Variable Manufacturing OVERHEAD	$6
Total	$23
Number of units	5800	$133400
Fixed Manufacturing OVERHEAD	$10
Percentage of cost to be eliminated	(10×40%)($4)
Cost	$6
Number of units	5800	$34800
Total relevant cost to make		$168200

calculate net relevant cost to buy

Cost to buy(5800×$32)	$185600
+Fixed overhead cost (5800×10×40%)	$23200
(-) CONTRIBUTION MARGIN by manufacturer part	($13200)
Net relevant cost to buy	$195600

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