Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Variable costs are $300,000 annually.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Dolphin Company's lowest net relevant cost for the parts?
A) $420,000
B) $440,000
C) $450,000
D) $480,000

Question

Quizplus · Accepted Answer

The lowest net relevant cost is $420,000. This is calculated as follows:Relevant costs:- Variable costs: $300,000- Fixed costs: $140,000- Opportunity cost of using the facilities to manufacture a new product: $30,000Total relevant costs: $470,000Relevant savings:- Purchase price of the part: $480,000Total relevant savings: $480,000Net relevant cost: $480,000 - $470,000 = $10,000

Dolphin Company Currently Produces 10,000 Units of a Key Part