The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.What are the relevant costs for the "make" alternative?
A)$120,000.
B)$175,000.
C)$190,000.
D)$200,000.

Question

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.  The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.What are the relevant costs for the "make" alternative?
A)$120,000. 
B)$175,000. 
C)$190,000. 
D)$200,000.

Quizplus · Accepted Answer

The relevant cost for the "make" alternative is the avoidable cost, which includes:
- Direct materials cost
- Direct labor cost
- Variable overhead cost
- Portion of fixed overhead cost that cannot be avoided
Direct materials and direct labor costs are not given, so we cannot consider them. 
Variable overhead cost per unit = Total Variable overhead cost / Number of units produced = $200,000 / 5,000 = $40 per unit
Portion of fixed overhead cost that can be avoided = $8 per unit
Portion of lease payments that can be avoided = $30,000 per year / 5,000 units per year = $6 per unit
Therefore, the relevant cost per unit = Variable overhead cost per unit + Portion of fixed overhead cost that can be avoided + Portion of lease payments that can be avoided = $40 + $8 + $6 = $54
Total relevant cost for 5,000 units = $54 x 5,000 = $270,000
Therefore, the total cost of "make" alternative is $270,000, which is higher than the cost of the "buy" alternative proposed by Daisy Company. So, the best choice is to "buy" from Daisy Company.

The Bremmer Company Produces 5,000 Units of Item ZQ98 Annually