The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener.The unit cost of manufacturing the motor for this pencil sharpener is: The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit.The relevant cost of manufacturing the motor to be considered in reaching the decision is:
A)$4.75.
B)$4.15.
C)$3.55.
D)$4.05.

Question

The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener.The unit cost of manufacturing the motor for this pencil sharpener is:  The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit.The relevant cost of manufacturing the motor to be considered in reaching the decision is:
A)$4.75. 
B)$4.15. 
C)$3.55. 
D)$4.05.

Quizplus · Accepted Answer

The relevant cost of manufacturing the motor is the cost that will be saved if the company decides to buy the motor from a subcontractor. This cost includes all the direct costs that will not be incurred if the company buys the motor from the subcontractor. In this case, the direct cost of manufacturing the motor is $4.15 per unit ($3.10 for materials and $1.05 for direct labor). Therefore, the best choice is to buy the motor from the subcontractor since it will cost only $3.60 per unit, resulting in a saving of $0.55 per unit.

The Fine Point Company Currently Produces All of the Components