Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows:
$\begin{array}{|l|l|}
\hline \text { Direct materials } & \$ 8 \
\hline \text { Direct labor } & 32 \
\hline \text { Variable overhead } & 12 \
\hline \text { Fixed overhead(based on normal capacity) } & 34 \
\hline
\end{array}$
If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
What is the relevant cost to produce one unit?

Question

Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows: 
$\begin{array}{|l|l|}
\hline \text { Direct materials } & \$ 8 \
\hline \text { Direct labor } & 32 \
\hline \text { Variable overhead } & 12 \
\hline \text { Fixed overhead(based on normal capacity) } & 34 \
\hline
\end{array}$ 
If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
What is the relevant cost to produce one unit?

Quizplus · Accepted Answer

The relevant cost to produce one unit includes direct materials, direct labor, variable overhead, and the portion of fixed overhead that cannot be eliminated if production is stopped. This is calculated as $8 (direct materials) + $32 (direct labor) + $12 (variable overhead) + ($34 - $8) (non-eliminable fixed overhead) = $60.

Anderson Co If Anderson Accepts the Order, $8 of Fixed Overhead Per