Holt Pty Ltd presently makes 20 000 units of a certain part to use in production. The cost to make the part is $20 per unit including $15 in variable costs and $5 in fixed overhead applied. If Holt buys the part from Bricker, the cost would be $18 per unit and the released facilities could not be used for any other activity. Eighty per cent of the fixed overhead would continue. Determine the relevant costs to make the part.

Question

Quizplus · Accepted Answer

The relevant costs to make the part include the variable costs and the portion of fixed costs that would be saved if the part were not made. The variable cost is $15 per unit for 20,000 units, which equals $300,000. Since 80% of the fixed overhead would continue even if the part were not made, only 20% of the fixed overhead is relevant. The fixed overhead per unit is $5, so for 20,000 units, it totals $100,000. 20% of this is $20,000. Therefore, the relevant costs to make the part are $300,000 (variable costs) + $20,000 (relevant fixed costs) = $320,000.

Holt Pty Ltd Presently Makes 20 000 Units of a Certain