Question

Every year Bridgeport Industries manufactures 6,200 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Direct materials		$ 5
Direct labor		12
Variable manufacturing overhead		6
Fixed manufacturing overhead		10
Total		$33

Flintrock, Inc., has offered to sell 6,200 units of part 231 to Bridgeport for $34 per unit. If Bridgeport accepts Flintrock’s offer, its freed-up facilities could be used to earn $12,800 in contribution margin by manufacturing part 240. In addition, Bridgeport would eliminate 40% of the fixed overhead applied to part 231.

(a) Calculate total relevant cost to make and net cost to buy.

Total relevant cost to make	$Enter total relevant cost to make in dollars
Net relevant cost to buy	$Enter net relevant cost to buy in dollars

(b) Should Bridgeport accept Flintrock’s offer?

Select an option                                                          Yes No

Answer 1

Answer)

Calculation of relevant cost to make Part 231

Relevant cost to make Part 231	Amount (In $)
Cost to be incurred due to manufacture of Part 231:
Direct Material (6,200 units X $ 5 per unit)	31,000
Direct Labor (6,200 units X $ 12 per unit)	74,400
Variable manufacturing overhead (6,200 units X $ 6 per unit)	37,200
Avoidable fixed manufacturing overhead (6,200 Units X $ 10 X 40%)	24,800
Total relevant cost to make	167,400

Therefore relevant cost to make 6,200 units of Part 231 is $ 167,400.

Calculation of Net relevant cost to buy Part 231

Relevant cost to Buy	Amount (In $)
Cost to be incurred due to purchase of Part 231:
Purchase Price (6,200 units X $ 34 per unit)	210,800
Less: Benefit to be achieved from released capacity (Contribution margin of Part 240)	12,800
Net relevant cost to buy	198,000

Therefore the net relevant cost to buy Part 231 is $ 198,000.

Answer 2)

Since the relevant cost to make Part 231 (i.e. $ 167,400) is less than the relevant cost to buy Part 231 (i.e. $ 198,000), Bridgeport should not accept Flintrock’s offer and should continue to make Part 231 in house.