PT corp makes 300 units of A per year. At this level, the cost per unit...

PT corp makes 300 units of A per year. At this level, the cost per unit includes $360 in direct materials, $1,000 in direct labor, $240 in variable overhead, and $900 in fixed overhead. An outside supplier has offered to make all 300 units for $2,100 per unit. If PT accepts this offer, two thirds of the fixed overhead would persist, but would be defrayed by renting out the floor space for $83,000 per year.

What are the relevant costs (in total) for continuing to make this product?

Expert Solution

Ans: Relevant Costs- Relevant costs are the costs that is relevant to a decision making and by making such decision, there is a change in cash flow. They differs between alternatives. Costs that can be avoided are relevant costs.

In this question, PT Corp makes 300 units of A per year for which it incurs $360 for direct materials, $1000 for direct labor and $240 for variable overhead. It also incurs $900 as fixed overhead. An outside supplier offered to make the product A for $2100 per unit.

Here, Relevant costs for making the product are

1. Variable costs are always relevant as the variable costs will be different if the production level changes.

2. Two thirds of the fixed costs i.e., $900* 2/3 = $600 are unavoidable in both the alternatives and therefore these are irrelevant costs. But one third of $900 i.e., $300 are avoidable if the company accepts the offer and therefore it is relevant cost.

3. Rent is the income foregone if the company makes the product as it is an opportunity cost. Therefore, it is an relevant cost

Differential Analysis

	Make	Buy
Direct Material ($360*300 units)	$108000
Direct Labour ($1000*300units)	$300000
Variable Overhead ($240*300 units	$72000
Fixed Overhead ($9001/3300 units)	$90000
Purchase Price ($2100*300 units)		$630000
Less: Additional benefit from Buying from outside		-$83000
Total Relevant Costs	$570000	$547000

As the cost of buying is lower than the making, to ontinue making this product, making cost should be lower or equal to the cost of buying.

And therefore,to continue making this product, relevant cost here is the lower of both the cost i.e., $547000.

ekkarill92 answered 3 weeks ago

Xenon Corp. makes 63,200 units per year of a part it uses in the products it...

Xenon Corp. makes 63,200 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct material $21.30 Direct labor $24.60 Variable manufacturing overhead $7.35 Fixed manufacturing overhead $30.60 Unit product cost $83.85 An outside supplier has offered to sell the company all of the 63,200 parts it needs for $78.50 a unit. If the company accepts this offer, the facilities now being used to make the...

Price per Unit Variable Cost per Unit Units Sold per Year Basic $ 700 $ 220...

Price per Unit Variable Cost per Unit Units Sold per Year Basic $ 700 $ 220 700 Retest 1,050 580 200 Vital 4,600 3,100 100 Variable costs include the labor costs of the medical technicians at the lab. Fixed costs of $490,000 per year include building and equipment costs and the costs of administration. A basic "unit" is a routine drug test administered. A retest is given if there is concern about the results of the first test, particularly if...

1. A) If a company makes 100 units of product, the allocated fixed cost per unit...

1. A) If a company makes 100 units of product, the allocated fixed cost per unit is $5 and the variable cost per unit is $6. What will be the per-unit total cost (fixed plus variable cost) if the company makes 200 units? B) At a production and sales level of 1,000 units, the company’s costs are as follows: Variable manufacturing costs per unit $20 Allocated fixed manufacturing cost per unit $10 Variable selling costs per unit $ 5 Allocated...

Martin Corp. currently sells 180,000 units per year at a price of $7.00 per unit; its...

Martin Corp. currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed costs are $400,000. What is Martin’s operating breakeven point in both a) units and b) dollars (6 points).

Ahngram Corp. has 1,000 defective units of a product that cost $2.50 per unit in direct...

Ahngram Corp. has 1,000 defective units of a product that cost $2.50 per unit in direct costs and $6.00 per unit in indirect cost when produced last year. The units can be sold as scrap for $3.50 per unit or reworked at an additional cost of $2.00 and sold at full price of $10.50. The incremental net income (loss) from the choice of reworking the units would be: Multiple Choice $3,500. $0. ($2,000). $8,500. $2,000. Please explain how you get...

Units Demanded: Q = 500-40P Total Cost = 300 + Q Price Per Unit = 6...

Units Demanded: Q = 500-40P Total Cost = 300 + Q Price Per Unit = 6 Find: Q, Revenue, and Profit Negative Externality Unit Cost = 2 Recalculate Revenue and Profit if Costs are Internalized and i) passed on to consumers, or they are ii) absorbed by the firm.

The following annual per unit cost data at an activity level of 4,000 units has been...

The following annual per unit cost data at an activity level of 4,000 units has been provided below. The company produces and sells only one product.: $ Per Unit Sales 400.00 Direct labor 18.00 Direct material 22.00 Variable manufacturing overhead 4.00 Fixed manufacturing overhead 20.00 Variable selling expenses 2.00 Fixed selling expenses 5.00 Fixed administrative expenses 3.00 The relevant range is 2,500 - 5,500 units. You will be given facts for three different options. Using the facts given, calculate amounts...

15-2: At a production level of 100 units, the per unit cost under Absorption Costing is...

15-2: At a production level of 100 units, the per unit cost under Absorption Costing is $8, which consists of $2 of direct materials, $2 of direct labor, $2 of variable manufacturing overhead, and $2 of fixed manufacturing overhead. Calculate the Absorption Costing per unit cost assuming the production level is increased to 200 units? 15-3: Hank’s Hot Dog Factory manufactures hot dogs. The factory’s cost structure is as follows: fixed manufacturing costs per month are $8,000. Variable manufacturing costs...

Diesel: At an activity volume of 60,000 units per year, the unit cost of production of...

Diesel: At an activity volume of 60,000 units per year, the unit cost of production of this part is calculated as follows: By Unit Total Raw Materials $4 Direct Labor $2.75 Variable indirect manufacturing costs $0.50 Specific manufacturing indirect costs $3 $180000 Common fixed manufacturing indirect costs $2.25 $135000 Unit cost for product $12.50 An outside supplier offered to sell Carthage Inc. this electrical component at only $ 10 per unit. One-third of the specific fixed manufacturing overhead is made...

QP Corp. sold 5,470 units of its product at $45.30 per unit during the year and...

QP Corp. sold 5,470 units of its product at $45.30 per unit during the year and incurred operating expenses of $6.30 per unit in selling the units. It began the year with 630 units in inventory and made successive purchases of its product as follows. Jan. 1 Beginning inventory 630 units @ $18.30 per unit Feb. 20 Purchase 1,530 units @ $19.30 per unit May 16 Purchase 730 units @ $20.30 per unit Oct. 3 Purchase 430 units @ $21.30...

Question