Question

Fact pattern: richardson motors uses 10 units of part no. t305 each month in the production of large diesel engines. the cost to manufacture one unit of t305 is presented as follows: direct materials $ 2,000 materials handling (20% of direct materials cost) 400 direct labor 16,000 manufacturing overhead (150% of direct labor) 24,000 total manufacturing cost $42,400 materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed. simpson castings, one of richardson's reliable vendors, has offered to supply t305 at a unit price of $30,000. assume the rental opportunity does not exist and richardson motors could use the idle capacity to manufacture another product that would contribute $104,000 per month. if richardson chooses to manufacture the ten t305 units in order to maintain quality control, richardson's opportunity cost is

Answer 1

Amount spent if Richardson does not manufacture t305

Amount spent to Purchase 10 units from Simpson@30000 per unit 300000

Fixed Cost Of the Unit which will require to be incurred Irrespective 160000

(2/3 of Manufacturing Overheads)

Total Cost 460000

Amount of Contribution earned from other Product (104000)

Net Expense 356000

If Richarson Manufactures total cost of 10 units 424000

Thus the opportunity cost if Richardson Manufactures is 68000

(424000-356000)

As they will incur an expense of $68000 more if the part is manufactured.