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: $\begin{array}{l}
\begin{array}{lll}
\text { Direct Materials}\
\text { Direct Labour}\
\text { Variable Manufacturing Overhead}\
\text { Fixed Manufacturing Overhead}\
\
\text { Cost to buy the part from the Oriole Company: }\
\end{array}
\begin{array}{lll}
\$ 4 \
\$ 16 \
\$ 8 \
\$ 10 \
\$ 38 \
\$ 36
\end{array}
\end{array}$

Oriole 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?
A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

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: $\begin{array}{l}
\begin{array}{lll}
\text { Direct Materials}\
\text { Direct Labour}\
\text { Variable Manufacturing Overhead}\
\text { Fixed Manufacturing Overhead}\
\
\text { Cost to buy the part from the Oriole Company: }\
\end{array}
\begin{array}{lll}
\$ 4 \
\$ 16 \
\$ 8 \
\$ 10 \
\$ 38 \
\$ 36
\end{array}
\end{array}$

Oriole 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?
A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

Quizplus · Accepted Answer

Total relevant cost to make the part = Direct Materials + Variable Manufacturing Overhead + (40% * Fixed Manufacturing Overhead) = $4 + $8 + ($10*40%) = $7.20 per unit.

Therefore, the total relevant cost for making 20,000 units = $7.20 * 20,000 = $144,000.

Total cost to buy from Oriole = $36 * 20,000 = $720,000.

Since the cost to buy from Oriole ($720,000) is higher than the total relevant cost to make ($144,000), it is best for Cardinal Company to make the part.

Cardinal Company Needs 20,000 Units of a Certain Part to Use