Edmond Corporation has been manufacturing 5,000 units of Part 10541,which is used in the manufacture of one of its products.At this level of production,the cost per unit of manufacturing Part 10541 is as follows: Arcadia Company has offered to sell Edmond 5,000 units of Part 10541 for $19 a unit.Edmond has determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part RAC and generate an operating profit of $4,000.Edmond has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Arcadia.To determine whether to accept Arcadia's offer,the net relevant costs to make are
A)$70,000.
B)$84,000.
C)$90,000.
D)$95,000.

Question

Edmond Corporation has been manufacturing 5,000 units of Part 10541,which is used in the manufacture of one of its products.At this level of production,the cost per unit of manufacturing Part 10541 is as follows:  Arcadia Company has offered to sell Edmond 5,000 units of Part 10541 for $19 a unit.Edmond has determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part RAC and generate an operating profit of $4,000.Edmond has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Arcadia.To determine whether to accept Arcadia's offer,the net relevant costs to make are
A)$70,000. 
B)$84,000. 
C)$90,000. 
D)$95,000.

Quizplus · Accepted Answer

The relevant costs to make 5,000 units of Part 10541 are as follows:

Variable costs:
Direct materials: $10 per unit x 5,000 units = $50,000
Direct labor: $9 per unit x 5,000 units = $45,000
Variable overhead: $2 per unit x 5,000 units = $10,000
Total variable costs = $105,000

Fixed costs:
Fixed manufacturing overhead: $20,000
Fixed administrative overhead: $10,000
Total fixed costs = $30,000

Total cost to make Part 10541 = $105,000 + $30,000 = $135,000

If Edmond were to purchase 5,000 units of Part 10541 from Arcadia, the cost would be $19 per unit x 5,000 units = $95,000.

If Edmond were to manufacture Part RAC, they would generate an additional operating profit of $4,000. However, two-thirds of the fixed overhead applied to Part 10541 will continue even if Part 10541 is purchased from Arcadia. Therefore, the relevant fixed costs for manufacturing Part RAC are:

Fixed manufacturing overhead: $20,000 x 2/3 = $13,333
Fixed administrative overhead: $10,000 x 2/3 = $6,667
Total relevant fixed costs for manufacturing Part RAC = $20,000

The net relevant cost to make the decision is the total cost to make Part 10541 ($135,000) minus the cost to purchase Part 10541 from Arcadia ($95,000) plus the relevant additional fixed costs to manufacture Part RAC ($20,000) plus the additional operating profit from manufacturing Part RAC ($4,000).

Net relevant cost = $135,000 - $95,000 + $20,000 + $4,000 = $64,000

Therefore, the best choice is to purchase Part 10541 from Arcadia as it results in a lower net relevant cost. The answer is B.

Edmond Corporation Has Been Manufacturing 5,000 Units of Part 10541,which