Golden,Inc.has been manufacturing 5,000 units of Part 10541 which is used in one of its products.At this level of production,the unit product cost of Part 10541 is as follows: Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown.Assume that direct labour is an avoidable cost in this decision.To determine whether to accept Brown's offer,the relevant costs to Golden of manufacturing the parts internally are:

Question

Golden,Inc.has been manufacturing 5,000 units of Part 10541 which is used in one of its products.At this level of production,the unit product cost of Part 10541 is as follows:  Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.Golden has determined that two thirds of the fixed manufacturing overhead will continue even if Part 10541 is purchased from Brown.Assume that direct labour is an avoidable cost in this decision.To determine whether to accept Brown's offer,the relevant costs to Golden of manufacturing the parts internally are:

Quizplus · Accepted Answer

To determine the relevant costs of manufacturing the parts internally, we need to consider the avoidable costs and the allocated fixed costs.

Avoidable costs:
- Direct materials: $6 per unit x 5,000 units = $30,000
- Direct labor: $4 per unit x 5,000 units = $20,000
- Total avoidable costs = $30,000 + $20,000 = $50,000

Allocated fixed costs:
- Fixed manufacturing overhead: $22 per unit x 5,000 units = $110,000
- Two-thirds of fixed manufacturing overhead = (2/3) x $110,000 = $73,333

Total relevant costs of manufacturing internally:
$50,000 + $73,333 = $123,333

Since Brown is offering to sell the parts for $19 per unit, the total cost to Golden would be:
$19 x 5,000 units = $95,000

Since the relevant cost of manufacturing internally is higher than the cost of purchasing from Brown, it is more beneficial for Golden to accept Brown's offer and purchase the parts externally. Therefore, the best choice is B.