Question

*please show calculations*

1. Royal Company manufactures 20,000 units of Part R-3 each year for use in its finished products. At this level of activity, the costs per unit for Part R-3 are as follows:

Direct materials	$4.80
Direct labor	7.00
Variable manufacturing overhead	3.20
Fixed manufacturing overhead	10.00
Total cost per part	25.00

An outside supplier has offered to sell 20,000 units of Part R-3 to Royal Company for $23.50 per part. If Royal Company accepts the supplier’s offer, the facilities now being used to manufacture Part R-3 could be rented out to another company for $150,000 per year. The costs of producing Part R-3 are avoidable; however, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to Part R-3 would continue even if Royal Company purchases Part R-3 from the outside supplier.

A. Royal Company should:

1. buy the part because there is $30,000 net advantage in doing so.
2. make the part because there is a $90,000 net advantage in doing so.
3. buy the part because there is a $60,000 net advantage in doing so.
4. do either. The relevant cost of making the part is the same as buying it.

B. In the context of Royal Company’s decision to make or buy Part R-3, the $150,000 rental income is a(n):

1. avoidable cost
2. variable cost
3. fixed cost
4. sunk cost
5. opportunity cost

2. Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company’s current activity level of 8,000 units per month are:

Direct materials	2.50
Direct labor	3.00
Variable manufacturing overhead	0.50
Fixed manufacturing overhead	4.25
Variable selling and administrative expenses	1.50
Fixed selling and administrative expenses	2.00

The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. Glade received an order from a potential overseas customer for 2,000 units at a price of $9 per unit. The order would not disrupt sales to Glade’s existing customers and would not change existing fixed costs.   However, there would be an order-related cost of $5,600 that Glade would incur because the company would have to buy a special stamp to put the customer’s name on the 2,000 units in the order.

A. Glade should:

1. accept the order because the company’s income would increase by $3,000
2. reject the order because the company’s income would decrease by $9,500
3. reject the order because the company’s income would decrease by $15,100
4. reject the order because the company’s income would decrease by $2,600
5. be indifferent to the order because it would change the company’s income

Answer 1