Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision is made. The following information is available: Cost to Kingston to make the part: In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:
A)$342,000.
B)$480,000
C)$530,000.
D)$570,000.
E)Some other amount.

Question

Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision is made. The following information is available: Cost to Kingston to make the part:  In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:
A)$342,000. 
B)$480,000 
C)$530,000. 
D)$570,000. 
E)Some other amount.

Quizplus · Accepted Answer

The relevant costs for Kingston to make the part are:
- Direct materials cost: 10,000 units x $27 per unit = $270,000
- Direct labor cost: 10,000 units x $18 per unit = $180,000
- Variable overhead cost: 10,000 units x $12 per unit = $120,000
- Incremental fixed overhead cost: 10,000 units x 40% x $80 per unit = $320,000
- Total relevant cost to make the part = $270,000 + $180,000 + $120,000 + $320,000 = $890,000

The cost to buy the part from Utica Company is given as $480,000.

Therefore, it is more cost-effective for Kingston to buy the part from Utica Company instead of making it in-house.

Kingston Company, Which Needs 10,000 Units of a Certain Part