Question

Gibson Electronics currently produces the shipping containers it uses to deliver the electronics products it sells. The monthly cost of producing 9,300 containers follows.

Unit-level materials	$	5,200
Unit-level labor		6,400
Unit-level overhead		4,200
Product-level costs*		7,800
Allocated facility-level costs		27,900

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

Russo Container Company has offered to sell comparable containers to Gibson for $2.70 each.

Required

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

2. Gibson could lease the space it currently uses in the manufacturing process. If leasing would produce $11,200 per month, calculate the total avoidable costs. Should Gibson continue to make the containers?

Answer 1

		Relevant Cost
a)	Item	Make	Buy
	Direct Material	5200
	Direct Labor	6400
	Overhead	4200
	prout Lveel cost	2600		(7800/3)
	Cost of purchsing from outside supplier		25110
	Total Cost	18400	25110
	Gibson should make the container to sav $6710
b)		Relevant Cost
	Item	Make	Buy
	Direct Material	5200
	Direct Labor	6400
	Overhead	4200
	prout Lveel cost	2600		(7800/3)
	Lease rent from space		-11200
	Cost of purchsing from outside supplier		25110
	Total Cost	18400	13910
	Gibson should buy the container to save $4490