Question

MC, Inc., produces ravioli, tortellini, and other cheese-filled pastas. Each unit of pasta contains 0.5 ounces of filling. Management estimates that MC will use 10,000 pounds of cheese filling each month. The costs associated with each pound of filling consist of $5.32 direct materials, $7.48 direct labor, $7.30 variable overhead, and $6.50 fixed overhead. Pasta Specialties has offered to supply 10,000 pounds of cheese filling each month for $202,600. If MC accepts the offer, 50% of the fixed overhead will not be incurred. Additionally, 50% of the direct labor hours will no longer be needed, and the workers will be laid off. The remaining direct labor hours will be used by the packaging department. In this situation, what is MC’s relevant cost per pound of cheese filling?

Answer 1

Relevant cost describes avoidable costs that are incurred to implement decisions.

Hence Avoidable cost if MC accepts the offer :

Direct Material : $ 5.32

Direct Labor = $ 7.48 x 50% = $ 3.74

Variable Overhead = $ 7.30

Fixed Overhead = $ 6.50 x 50% = $ 3.25

Total Avoidable cost i.e. relevant cost will be = $ 5.32+ $3.74+ $ 7.30+ $ 3.25

= $ 19.61 per unit

Hence relevant cost per pound of chesse filling will be $ 19.61 per unit.

Relevant cost per pound of cheese filling = Direct Material Cost + Direct labor Cost + Variable Overhead + Fixed Cost (Saved due to outsource if any)