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 change if the company decides to buy it from the sub-contractor instead of producing it themselves.

The motor's current unit cost is $11. To produce the motor in-house, Fine Point incurs additional costs such as labor, overhead, and other materials. Let's assume that these costs amount to $3 per unit. Hence, the total cost of manufacturing the motor would be $11+$3=$14.

If the company decides to buy the motor from the sub-contractor, they would only need to pay $3.60 per unit. This means that they would save $14-$3.60=$10.40 per unit.

Thus, the relevant cost of manufacturing the motor is $14-$10.40=$3.60+$0.55=$4.15. Therefore, the best choice is B) $4.15.

The Fine Point Company Currently Produces All of the Components