Question

The Marigold Company manufactures 1,006 units of a part that could be purchased from an outside supplier for $12 each. Marigold’s costs to manufacture each part are as follows:

Direct materials		$2
Direct labor		3
Variable manufacturing overhead		3
Fixed manufacturing overhead		9
Total		$17

All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses.

(a) Calculate relevant cost to make.

(b) Calculate net cost to buy if Marigold leases the manufacturing facilities to another company for $5,914 per year.

Answer 1

Answer (a)
Calculation of per unit Relevant cost “to Make” the part
Particulars	Cost Per unit (in $)
Direct Material	2.00
Direct Labour	3.00
Variable manufacturing overhead	3.00
Total	8.00
Note:
Fixed Overhead cost has not been considered in calculation of relevant cost of manufacture. It is because fixed overhead is a Sunk cost being unavoidable in nature.
Answer (b)
Calculation of Net Cost to Buy 1,006 units
Particulars	Amount (in $)
Purchase cost (1,006 units X $ 12.00 per unit)	12,072
Less: Benefit from released capacity (lease income)	5,914
Net Cost to Buy	6,158