Aholt Corporation makes 40, 000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit.If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand.The additional contribution margin on this other product would be $264, 000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier.This fixed manufacturing overhead cost would be applied to the company's remaining products.
How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?
A)$38.00 per unit
B)$59.90 per unit
C)$35.20 per unit
D)$22.70 per unit

Question

Aholt Corporation makes 40, 000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows:  An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit.If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand.The additional contribution margin on this other product would be $264, 000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier.This fixed manufacturing overhead cost would be applied to the company's remaining products.
How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?
A)$38.00 per unit 
B)$59.90 per unit 
C)$35.20 per unit 
D)$22.70 per unit

Quizplus · Accepted Answer

The relevant cost in this decision is the cost that will change as a result of the decision. In this case, the direct materials cost of $10.60 per unit and the direct labor cost of $18.40 per unit are avoidable costs if the company chooses to buy the part from the outside supplier. Therefore, the relevant cost is the total variable cost of $29.00 per unit plus the unavoidable fixed manufacturing overhead cost of $21.90 per unit, for a total of $50.90 per unit.

Since the outside supplier is offering to sell the part for $46.20 per unit, which is less than the relevant cost of $50.90 per unit, the company should choose to buy the part from the outside supplier. This will free up facilities to make more units of a product that has a higher contribution margin, resulting in a net increase in profit of $264,000 per year.

Aholt Corporation Makes 40, 000 Units Per Year of a Part