Question

Every year Pronghorn Industries manufactures 5,800 units of part 231 for use in its production cycle....

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

Homework Answers

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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