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Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below:

Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.
-Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the ten units from Simpson Castings, Richardson's monthly
Cost for T305 would:
A) Decrease $14,000
B) Increase $46,000
C) Decrease $34,000
D) Decrease $64,000

Question

Use the following to answer questions:
Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below:
  
Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.
-Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the ten units from Simpson Castings, Richardson's monthly
Cost for T305 would:
A) Decrease $14,000 
B) Increase $46,000 
C) Decrease $34,000 
D) Decrease $64,000

Quizplus · Accepted Answer

The correct answer is A because if Richardson Motors is able to rent all idle capacity for $50,000 per month, then the cost for T305 would decrease by $14,000 per month.

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