Question

XYZ Company manufactures plugs at a cost of $41 per unit, which includes $15 of overhead, and 30% of the overhead is variable. XYZ needs 40,000 of these plugs annually (as part of a larger product it produces). ABC Company has offered to sell these units to Regis at $32 per unit.
If XYZ decides to purchase the plugs, $100,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.
If the plugs are purchased and the facility rented, XYZ Company wishes to realize $100,000 in net savings annually.
Note: round all decimals to two places.

What is the relevant cost make?
To achieve a net savings of $100,000 annually, the minimum annual rent on the facility must be?

Answer 1

Requirement a:

Relevant cost make = $1,220,000

Calculations:

XYZ Company
	Amount
Total cost per unit	$ 41
(Less): Overhead	($ 15)
Direct cost per unit	$ 26
Add: Variable overhead (15 x 30%)	$ 5
Relevant cost per unit	$ 31
Number of units	40,000
Relevant cost to make [$31 x 40,000]	$ 1,220,000

Requirement b:

Minimum annual rent on facility must be = $40,000

Calculations:

XYZ Company
	Amount
Offer price per unit	$ 32
(Less): Relevant cost per unit	($ 31)
Excess price per unit	$ 1
Number of units	40,000
Total excess payament [$1 x 40,000]	$ 40,000
Add : Annual Net savings	$ 100,000
Total savings needed	$ 140,000
(Less): Savings in fixed overhead	($ 100,000)
Minimum annual rent	$ 40,000