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 make?
To achieve a net savings of $100,000 annually, the minimum annual rent on the facility must be?

Answer 1

	(In $)
Total Cost Per Unit	38
Less;- Fixed Overhead	9
Variable Cost Per Unit	29
Overhead	15
Variable OH@40%	6
Fixed OH	9
Relevant Cost of Make
Variable Cost@29	11,60,000
Add:- Avoidable Fixed Cost	1,00,000
Add:- Opportunity Cost of rent	1,00,000
Total Relevant Cost of Make	13,60,000
Relevant Cost of Make(per Unit)	34
Total Relevant Cost of Make	13,60,000
Cost of Buy	12,80,000
Net Savings in Buy	80,000
Currently Net Saving is $80,000 , To Achive a Net Savings of $1,00,00 rent should be increased by $20,000. Therefore Minimum annual rent on the facility must be $1,20,000 (1,00,000+20,000)