Question

Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 9,900 units of the part that are needed every year.

	Per Unit
Direct materials	$	6.30​
Direct labor	$	3.50​
Variable overhead	$	6.90​
Supervisor's salary	$	2.60​
Depreciation of special equipment	$	2.20​
Allocated general overhead	$	1.20​
Total	$	22.70

An outside supplier has offered to make the part and sell it to the company for $22.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,200 per year for that product.

Required: Use this information to answer questions A - C below. There is partial credit for this problem if you show your work in the space provided.

Question A (Recher) Of the $22.70 per unit cost above, how much per unit is relevant? (Round final answer to two decimal places)

Question B (Recher) Assuming the company considers opportunity costs, what is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? Denote the sign of your answer, so that negative is a disadvantage. (Round your final answer to the nearest dollar)

Question C (Recher) What is the maximum amount per unit the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all units required? (Round final answer to two decimal places)

Answer 1

A)
Relevant Cost	$
Direct Material Cost	6.3
Direct Labour Cost	3.5
Variable Overhead	6.9
Supervisor Salary	2.6
General Overhead	0.4	(4000/9900)
Total Relevant cost	20

B)	If Supplier Offer is Accepted
1)	Saving in cost	$	$
	Direct Material Cost	6.3
	Direct Labour Cost	3.5
	Variable Overhead	6.9
	Total Variable cost	16.7
	Units	9900
	Total Variable cost		165330
	Supervisor Salary		25740
	General Overhead		4000
	Margin of Other Product		16200
	Total Saving in cost		211270
2)	Cost to be Incurred
	Purchase cost		217800	(22*9900)
	Disadvantage to company		-6530

(c) Maximum Company can pay $ 21.34

Particulars		$
Cost to Company		211270
Units		9900
Per Unit Cost		21.34