Question

Benson Electronics currently produces the shipping containers it uses to deliver the electronics products it sells. The monthly cost of producing 9,200 containers follows:

Unit-level materials	$	6,600
Unit-level labor		6,800
Unit-level overhead		4,100
Product-level costs*		9,600
Allocated facility-level costs		27,000

*One-third of these costs can be avoided by purchasing the containers.

Russo Container Company has offered to sell comparable containers to Benson for $2.60 each.

Required

1. Calculate the total relevant cost. Should Benson continue to make the containers?

2. Benson could lease the space it currently uses in the manufacturing process. If leasing would produce $11,100 per month, calculate the total avoidable costs. Should Benson continue to make the containers?

Answer 1

a. Calculation of total relevant cost;

unit level materials	$6,600
unit level labor	6,800
unit level overhead	4,100
product level costs (only 1/3 rd avoidable is relevant=>9,600*1/3)	3,200
Total relevant cost for making	$20,700

Relevant cost for purchasing option= $2.60 per container *9200 containers =>$23,920.

Since total relevant cost for making the containers is low, it can continue to make the containers

b.

Total relevant cost (as above)	$20,700
add: lease amount (opportunity cost)	$11,100
Total avoidable cost	$31,800

Relevant cost for purchasing option = $23,920 (as calculated above).

Since total avoidable cost for making is high, one can avoid making containers and purchase from Russo container company.