Question

Kingston Company needs 10,000 units of a certain part to be used in its production cycle. The following information is available concerning Kingston's unit product cost: Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each. If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. In deciding whether to make or buy the part, the total relevant costs to make the part internally are:____________.

a. $342,000
b. $480,000
c. $530,000
d. $570,000

Answer 1

b. $480,000

Step-by-step explanation:

Calculation for the total relevant costs to make the part internally

Relevant cost per unit:

Direct materials $6

Direct labor 24

Variable manufacturing overhead 12

Fixed manufacturing overhead 6

[$15 ×(100%- 60%)]

Relevant manufacturing cost 48

(6+24+12+6)

Total relevant costs to make the part internally $480,000

($48 × 10,000)

Therefore the total relevant costs to make the part internally are: $480,000