Edmond Corporation has been manufacturing 5,000 units of Part 10541, which is used in the manufacture of one of its products. At this level of production, the cost per unit of manufacturing Part 10541 is as follows: Arcadia Company has offered to sell Edmond 5,000 units of Part 10541 for $19 a unit. Edmond has determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part RAC and generate an operating profit of $4,000. Edmond has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Arcadia. To determine whether to accept Arcadia's offer, the net relevant costs to make are

Question

Edmond Corporation has been manufacturing 5,000 units of Part 10541, which is used in the manufacture of one of its products. At this level of production, the cost per unit of manufacturing Part 10541 is as follows:  Arcadia Company has offered to sell Edmond 5,000 units of Part 10541 for $19 a unit. Edmond has determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part RAC and generate an operating profit of $4,000. Edmond has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Arcadia. To determine whether to accept Arcadia's offer, the net relevant costs to make are

Quizplus · Accepted Answer

To determine the relevant costs to make, we need to consider the incremental costs and benefits of manufacturing Part 10541 versus purchasing it from Arcadia.

Incremental cost to manufacture Part 10541:
- Variable cost per unit: $11
- Total variable cost for 5,000 units: 5,000 x $11 = $55,000
- Additional fixed cost (two-thirds of current fixed overhead): $20,000 x 2/3 = $13,333
- Total cost to manufacture 5,000 units of Part 10541: $55,000 + $13,333 = $68,333

Incremental cost to purchase Part 10541 from Arcadia:
- Purchase cost per unit: $19
- Total purchase cost for 5,000 units: 5,000 x $19 = $95,000
- Operating profit from manufacturing Part RAC: $4,000
- Net relevant cost to make: $68,333 - $4,000 = $64,333
- Net relevant cost to purchase: $95,000

Since the net relevant cost to purchase is higher than the net relevant cost to make, it is better for Edmond to continue manufacturing Part 10541 rather than purchasing it from Arcadia. The difference between the two options is represented by the incremental cost to purchase: $95,000 - $64,333 = $30,667. This represents the amount that Edmond would save by continuing to manufacture Part 10541 rather than purchasing it from Arcadia.

Edmond Corporation Has Been Manufacturing 5,000 Units of Part 10541