Question

Tyler Industries currently manufactures one of its crucial parts at a cost of $4.50 per unit. This cost is based on a normal production rate of 50,000 units per year. Direct materials and direct labor costs are $2.50 per unit, incremental overhead costs related to making this part are $50,000 per year, and allocated fixed overhead costs are $50,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Tyler is considering buying the part from a supplier for a quoted price of $3.70 per unit guaranteed for a three-year period. What is the relevant cost of making the 50,000 units?

Answer 1

Answer:

$175,000

Explanation:

Given:

Per unit cost of manufacturing = $4.50

Normal production rate = 50,000 units per year

Direct materials and direct labor costs = $2.50 per unit

Incremental overhead costs = $50,000 per year

Allocated fixed overhead costs = $50,000 per year

Quoted price = $3.70 per unit

Now,

total relevant cost per unit

= Direct materials and direct labor costs + (allocated fixed overhead costs ÷ Number of units to be made )

= $2.50 + $\frac{50,000}{50,000}$

= $2.50 + $1

= $3.50

Therefore,

Total relevant cost of making 50000 units

= $3.5 × 50,000

= $175,000