Question

Relevant cost, the make or buy decision

The Rocky Road Company has the following cost information regarding a product that it makes with a current volume of 40,000 units.

Unit Cost

Total Cost

Direct Material

$100

$4,000,000

Direct Labor

$40

$1,600,000

VMOH

$60

$2,400,000

FMOH

$75

$3,000,000

It had has been approached by the Smooth Road Company with an offer to make this product.

The offer is to make 40,000 units at a cost of $240 per unit.

After a special study of the make or buy decision, the Rocky Road Company determined that of its total fixed costs of $3,000,000, there were avoidable costs of $1,200,000.

Provide the following:

A) The per unit cost for each input and total cost to make the product

B) The per unit and total cost to buy the product from the Smooth Road Company

C) Your recommendation (with a short rationale as to why)

The special study determined that if the Rocky Road Company accepted the offer made by the Smooth Road Company, then additional resources would be freed that could be used to generate additional units of another product. This would generate $6,000,000 in revenues at a cost of $5,400,000. In light of this new information, please show your work and provide:

D) The total cost to make the product

E) The total cost to buy the product from the Smooth Road Company

F) Your recommendation (with a short rationale as to why)

Answer 1