Question

McMurphy Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 13,000 units of this part are as​ follows: Direct materials $ 88,000 Direct labor 127,000 Variable factory overhead 59,000 Fixed factory overhead 137,000 Total costs $ 411,000 Of the fixed factory overhead​ costs, $ 55,000 is avoidable. Conners Company has offered to sell 13,000 units of the same part to McMurphy Corporation for $ 37 per unit. Assuming there is no other use for the​ facilities, Schmidt should​ ________.

Answer 1

Answer:

Opportunity cost ($481,000) is greater than the total production cost ($356,000). McMurphy corporation should produce the products by itself instead of buying from Conners Company since the production costs are lower than purchase cost

Explanation:

Determine the total cost associated with the production of the units as follows;

T=M+L+V+F

where;

T=total costs

M=direct materials cost

L=direct labor costs

V=variable factory overhead costs

F=fixed factory overhead costs

In our case;

M=$88,000

L=$127,000

V=$59,000

F=$137,000

replacing;

T=(88,000+127,000+59,000+137,000)=$411,000

Total costs=$411,000

Assuming the McMurphy avoids 55,000 fixed factory overhead cost;

Total costs=411,000-55,000=$356,000

The opportunity cost if McMurphy Corporation decides to purchase the units from Conners Company instead of producing them will be;

Opportunity cost=cost per unit×number of units

cost per unit=$37

number of units=13,000 units

Opportunity cost=37×13,000=$481,000

Opportunity cost ($481,000) is greater than the total production cost ($356,000). McMurphy corporation should produce the products by itself instead of buying from Conners Company since the production costs are lower than purchase cost