Question

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 units are produced, the costs per unit are:

Direct materials $12

Direct manufacturing labor 60

Variable manufacturing overhead 26

Fixed manufacturing overhead 32

Total $130

Monty Company has offered to sell to Lewis Auto Company 10,000 units of the part for $122 per unit. The plant facilities could be used to manufacture another item at a savings of $198,000 if Lewis accepts the offer. In addition, $20 per unit of fixed manufacturing support on the original part would be eliminated.

Required:

Which alternative is best for Lewis Auto Company? By how much – please show your work!

Answer 1

Relavent cost
Direct Material=$12

Direct Manufacturing Overhead= $60

Variable Manufacturing Overhead=$26

Avoidable fixed Mfr Overhead=$20

Total relavent cost per unit=$118

B)Purchase price per unit=122$

Loss on Purchase instaed of Manufacturing $40000

=($122-$118)*10000units
=40,000$

Margin from plant facilities in manufacturing another part:$1,98,000

so net benefit due to purchase=1,98,000-40,000

=$1,58,000
so Purchase from Monty company is Best Alternative

note:
unavoidable fixed cost 12$ (32-20) is irrelavent for decission making