Question

Cardinal company needs 20,000 units of a certain part to use in one of its products. the following information is available:cost to cardinal to make the part: direct materials$4direct labour$16variable manufacturing overhead$8fixed manufacturing overhead$10 $38cost to buy the part from the oriole company:$36oriole company has offered to sell this part to cardinal company for $36 each. if cardinal were to buy the part from oriole instead of making it, cardinal would not have any use for the released capacity. in addition, 60% of the fixed manufacturing overhead costs would continue regardless of what decision is made. assume that direct labour is an avoidable cost in this decision.

In deciding whether to make or buy the part, what would be the total relevant costs to make the part?

Answer 1

The total relevant costs to make 20,000 units at Cardinal Company are calculated by adding the direct materials, direct labor, variable manufacturing overhead, and the relevant portion of fixed manufacturing overhead, which amounts to $640,000.

Step-by-step explanation:

In deciding whether to make or buy the part, the total relevant costs to make the part at Cardinal Company must include only the costs that will be affected by the decision. These costs are the direct materials, direct labor, variable manufacturing overhead, and the portion of fixed manufacturing overhead that will not continue if production is halted. Since 60% of the fixed overhead will continue regardless of the decision, only 40% is relevant.

Direct materials: $4 per unit
Direct labor: $16 per unit
Variable manufacturing overhead: $8 per unit
Relevant portion of fixed manufacturing overhead: ($10 per unit * 40%) = $4 per unit

The total relevant costs to make one unit are: $4 + $16 + $8 + $4 = $32 per unit. For 20,000 units, this equates to $32 * 20,000 = $640,000.