Answer:
Richardson's opportunity cost is $8,000
Explanation:
If Richardson motors manufacture t305 themselves the total manufacturing cost per unit is $42,400.
Overhead of $24,000 is 1/3 variable and 2/3 of fixed, that means $16,000 of that would continue.
Therefore the avoidable variable manufacturing cost per unit is $24,000+$2000+$400= $26,400.
But, if Richardson Motors decides to buy the t305 from Simpson Castings then the per unit variable cost will be $36,000 ($30,000 purchase price + $6,000 material handling cost applied {i.e 20% X $30,000 per unit}).
Therefore, if they buy from Simpson Castings the per unit cost of the t305 component will no longer be the same. There will be an increase
I.e $36,000-$26,400=$9,600
If they buy 10 units per month, the total cost per month would increase by $9,600 X 10 =$96000.
If Richardson Motors happens to use the idle capacity to manufacture another product that would contribute $104,000 per month, then the opportunity cost would be:
$104,000 - $96,000 = $8,000
