Question

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

Richardson's opportunity cost is $8,000

Step-by-step explanation:

If Richardson motors manufacture t305 themselves the total manufacturing cost per unit is $42,400.

Overhead of $24,000 is 1/3 variable and 2/3 of fixed, that means $16,000 of that would continue.

Therefore the avoidable variable manufacturing cost per unit is $24,000+$2000+$400= $26,400.

But, if Richardson Motors decides to buy the t305 from Simpson Castings then the per unit variable cost will be $36,000 ($30,000 purchase price + $6,000 material handling cost applied {i.e 20% X $30,000 per unit}).

Therefore, if they buy from Simpson Castings the per unit cost of the t305 component will no longer be the same. There will be an increase

I.e $36,000-$26,400=$9,600

If they buy 10 units per month, the total cost per month would increase by $9,600 X 10 =$96000.

If Richardson Motors happens to use the idle capacity to manufacture another product that would contribute $104,000 per month, then the opportunity cost would be:

$104,000 - $96,000 = $8,000