The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.
$$\begin{array} { l r }
\text { Direct materials } & \$ 20,000 \
\text { Direct labor } & 55,000 \
\text { Variable overhead } & 45,000 \
\text { Fixed overhead } &\underline{ 70,000} \
\text { Total } &\underline{ \$ 190,000}\

\end{array}$$
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year.
- What are the relevant costs for the "make" alternative?

Question

The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.
$$\begin{array} { l r } 
\text { Direct materials } & \$ 20,000 \
\text { Direct labor } & 55,000 \
\text { Variable overhead } & 45,000 \
\text { Fixed overhead } &\underline{ 70,000} \
 \text { Total } &\underline{  \$ 190,000}\

\end{array}$$
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year.
- What are the relevant costs for the "make" alternative?

Quizplus · Accepted Answer

The relevant costs for the "make" alternative include direct materials ($20,000), direct labor ($55,000), variable overhead ($45,000), and the avoidable portion of fixed overhead ($30,000, which is $70,000 total fixed overhead minus $40,000 that cannot be avoided). This totals $150,000. However, since $15,000 can be earned from renting out facilities if the product is not made, this opportunity cost should be added, making the total relevant cost $175,000.

The Camel Company Produces 10,000 Units of Item Roto 454