Question

Thermal Mugs, Inc. , manufactures various types of leak-proof personal drink carriers, Thermal's T6 container, its most insulated carrier, maintains the temperature of the liquid inside for 6 hours. Thermal has designed a new lid for the T6 carrier that allows for easier drinking and pouring. The cost to produce the new lid is: Direct materials $1 Direct labor $6 Avoidable fixed overhead per unit $7 Variable fixed overhead per unit 6 Plato Plastics has approached Thermal and offered to produce the 110,000 lids Thermal will require for current production levels of the T6 carrier, at a unit price of $16 each. What are the total relevant costs for Thermal Mugs?

Answer 1

The total relevant costs for Thermal Mugs amount to $2,200,000.

Step-by-step explanation:

The total relevant costs for Thermal Mugs can be calculated by considering the cost of producing the new lid as well as the unit price offered by Plato Plastics. The direct materials cost for the new lid is $1, and the direct labor cost is $6. Additionally, the avoidable fixed overhead cost per unit is $7, and the variable fixed overhead cost per unit is $6. By multiplying these costs by the number of lids required for current production levels (110,000), we can calculate the total relevant costs for Thermal Mugs.

Direct materials cost = $1 x 110,000 = $110,000

Direct labor cost = $6 x 110,000 = $660,000

Avoidable fixed overhead cost = $7 x 110,000 = $770,000

Variable fixed overhead cost = $6 x 110,000 = $660,000

Total relevant costs = Direct materials cost + Direct labor cost + Avoidable fixed overhead cost + Variable fixed overhead cost

Total relevant costs = $110,000 + $660,000 + $770,000 + $660,000

Total relevant costs = $2,200,000