Question

Every year Indigo Industries manufactures 6,700 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows: Direct materials $ 4 Direct labor 12 Variable manufacturing overhead 5 Fixed manufacturing overhead 10 Total $31 Flintrock, Inc., has offered to sell 6,700 units of part 231 to Indigo for $34 per unit. If Indigo accepts Flintrock’s offer, its freed-up facilities could be used to earn $10,900 in contribution margin by manufacturing part 240. In addition, Indigo would eliminate 50% of the fixed overhead applied to part 231. (a) Calculate total relevant cost to make and net cost to buy.

Answer 1

The total relevant cost to make is $167,500 and the net cost to buy $216,900.

Step-by-step explanation:

In order to calculate total relevant cost to make we would have to make the following calculation:

Total Relevant cost to make = ($3+$12+$5)*6,700 + (50% of 10)*6,700

Total Relevant cost to make =$134,000+$33,500

Total Relevant cost to make = $167,500

In order to calculate the Net cost to buy we would have to make the following calculation:

Net cost to buy=( 34*6,700)-$10,900

Net cost to buy=227,800-$10,900

Net cost to buy=$216,900