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Managerial Accounting – Sample 2

Question:

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are: Direct Materials $12; Direct Manufacturing $60; variable Manufacturing overhead $24; Fixed Manufacturing overhead $32; total $128

Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.

What is the relevant per unit cost for the original part?

Which alternative is best for Lewis Auto Company? By how much?

Answer:

Relevant cost = Direct Material + direct manufacturing + Variable manufacturing overhead + Relevant fixed cost

= 12 + 60 + 24 + 20 = 116

Cost if the part is bought

Purchase price             10000 * 120                                        1200000

Add: Unavoidable fixed cost   10000 * (32 – 20)                   120000

Less: savings on alternate production                                     (180000)

Total cost                                                                                       1140000

 

Cost if manufactured

Units * cost                            10000*128                              1280000

Purchasing alternative is best and by 1280000- 1140000 = $140000

 

 

 

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