Question

XYZ Company manufactures plugs at a cost of $38 per unit, which includes $15 of overhead, and 40% of the overhead is variable. XYZ needs 40,000 of these plugs annually (as part of a larger product it produces). ABC Company has offered to sell these units to Regis at $32 per unit. If XYZ decides to purchase the plugs, $100,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If the plugs are purchased and the facility rented, XYZ Company wishes to realize $100,000 in net savings annually.

Note: round all decimals to two places.

What is the relevant cost to make, and in order to achieve a net savings of $100,000 annually, what is the minimum annual rent of the facility?

(Please show your work in order to reproduce it and understand the process) Thanks.

Answer 1

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XYZ Company
Answer a	Amount $	Note
Total cost per unit	38.00	A
Less: Overhead	15.00	B
Direct cost per unit	23.00	C
Add: Variable Overhead (15*40%)	6.00	D=B*40%
Relevant cost per unit	29.00	E=C+D
Number of units	40,000.00	F
Relevant cost to make	1,160,000.00	G=E*F
Answer b	Amount $
Offer price per unit	32.00	H
Less: Relevant cost per unit	29.00	See E
Excess price per unit	3.00	I=H-E
Number of units	40,000.00	See F
Total excess payment	120,000.00	J=I*F
Add: Annual Net savings	100,000.00	K
Total savings needed	220,000.00	L=J+K
Less: Savings in fixed overhead	100,000.00	M
Minimum annual rent	120,000.00	N=L-M