Question

July Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost $ 3 Unit-level labor cost $ 2 Unit-level overhead $ 1 Batch-level set-up cost (5,000 units per batch) $ 25,000 Product-level supervisory salaries $ 37,500 Allocated facility-level costs $ 20,000 The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. Moreover the company would need to hire an additional supervisor. If the company decides to make the parts, total costs will be:

Answer 1

Answer:

$10,500

Explanation:

The computation of Total cost is shown below:-

Unit cost =  (Total income tax expense +  Unit-level overhead + Batch-level set-up cost) × Units per batch

= ($3 + $2 + $1) × 5,000

= $6 × 5,000

= $30,000

Total incremental cost = Unit cost + Batch level set up cost + Product level Supervisory salaries + Rental income

= $30,000 + $25,000 + $37,500 + $18,000

= $110,500

Now, Present cost = Switches cost × Units per batch

= $20 × 5,000

= $100,000

Net increase in cost = Total incremental cost - Present cost

= $110,500 - $100,000

= $10,500

Therefore for computing the net increase in cost we simply deduct the present cost from total incremental cost.