Vista Industries manufactures 75,000 digital cameras each year.Vista has been producing the lenses internally.However,late last year the company received an offer to produce the 150,000 lenses the company uses each year for a total contract price of $380,000.When Vista manufactures the lenses internally,direct materials cost $1.05 per lens,direct labor is $.65 per lens,and variable overhead is $.30 per lens.Vista's total overhead is $110,000.If the lens were purchased,$28,000 of fixed overhead could be avoided.What is the total relevant cost to produce the lenses internally?
A)$410,000
B)$328,000
C)$382,000
D)$380,000

Question

Quizplus · Accepted Answer

The relevant cost to produce the lenses internally can be calculated as follows:

Direct materials cost per lens = $1.05
Direct labor cost per lens = $0.65
Variable overhead cost per lens = $0.30
Total variable cost per lens = $1.05 + $0.65 + $0.30 = $2.00

Total cost to produce 150,000 lenses internally = 150,000 x $2.00 = $300,000

Total overhead cost incurred = $110,000
Fixed overhead cost avoided = $28,000

Total relevant cost to produce lenses internally = Total cost + Total overhead cost - Fixed overhead cost avoided
= $300,000 + $110,000 - $28,000
= $382,000

Therefore, the best choice is B ($328,000).

Vista Industries Manufactures 75,000 Digital Cameras Each Year