Seminole 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:
Direct material $ \$2 $
Direct1abor 8
Variable overhead 4
Fixed overhe ad applied $\underline{6}$
Total $\underline{\$20}$

Luther Company has offered to sell Seminole 5,000 units of Part 10541 for $19 a unit.Seminole 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.Seminole has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Luther.To determine whether to accept Luther's offer,the net relevant costs to make are

Question

Seminole 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:
Direct material                        $ \$2 $
Direct1abor                              8
Variable overhead                   4
Fixed overhe ad applied           $\underline{6}$
Total                                      $\underline{\$20}$

Luther Company has offered to sell Seminole 5,000 units of Part 10541 for $19 a unit.Seminole 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.Seminole has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from Luther.To determine whether to accept Luther's offer,the net relevant costs to make are

Quizplus · Accepted Answer

The net relevant cost to make is equal to the cost of making the part subtracted from the cost of buying the part from Luther, plus any additional costs or savings from making or buying the part.

Cost to make = Direct material + Direct labor + Variable overhead + Fixed overhead applied 
= $2 + $8 + $4 + $6 
= $20

Cost to buy = $19

Additional costs/savings = Operating profit from manufacturing Part RAC - two-thirds of fixed overhead applied for manufacturing Part 10541 
= $4,000 - (2/3)($6) 
= $4,000 - $4 
= $3,996

Therefore, the net relevant cost to make = $20 - $19 + $3,996 = $84,000.

Since the net relevant cost to make is higher than the cost to buy from Luther, it is more advantageous for Seminole to buy the parts from Luther Company.

Seminole Corporation Has Been Manufacturing 5,000 Units of Part 10541,which $2 \$2 $2

Seminole Corporation Has Been Manufacturing 5,000 Units of Part 10541,which $\$2$