Question

Golden, inc. has been manufacturing 5,000 units of part 10541, which is used in one of its products. at this level of production, the unit product cost of part 10541 is as follows: direct materials $2 direct labour $8 variable manufacturing overhead $4 fixed manufacturing overhead $6 unit product cost $20 brown company has offered to sell golden 5,000 units of part 10541 for $19 a unit. golden has determined that two-thirds of the fixed manufacturing overhead will continue even if part 10541 is purchased from brown. assume that direct labour is an avoidable cost in this decision. to determine whether to accept brown's offer, what are the relevant costs to golden of manufacturing the parts internally?

Answer 1

The relevant costs to Golden of manufacturing the parts internally are the avoidable costs, including direct materials, direct labor, and variable manufacturing overhead. The fixed manufacturing overhead is not avoidable. The total relevant cost would be $70,000.

Step-by-step explanation:

When determining whether to accept Brown's offer, the relevant costs to Golden of manufacturing the parts internally are the avoidable costs. In this case, the avoidable costs are the direct materials, direct labor, and variable manufacturing overhead, since Golden can purchase the parts from Brown. The fixed manufacturing overhead is not avoidable, as two-thirds of it will continue even if the parts are purchased from Brown. Therefore, the relevant costs to Golden of manufacturing the parts internally would be:

• Direct materials: $2/unit x 5,000 units = $10,000
• Direct labor: $8/unit x 5,000 units = $40,000
• Variable manufacturing overhead: $4/unit x 5,000 units = $20,000

This would result in a total relevant cost of $70,000 for manufacturing the parts internally.