Answer:
Recher Corporation:
a) Financial impact of buying part Q89:
i) Relevant costs for In-house production of part Q89 are the avoidable costs:
Direct materials - $7.60
Direct labour - $4.20
Variable overhead - $8.30
Supervisor's salary $3.20
Avoidable general overhead - $0.81
Avoidable cost = $24.11 per unit
Total = $24.11 x 6,200 = $149,482
ii) Relevant cost of buying outside equals outside price minus additional segment savings = (6,200 x $27) - $15,600 = $151,800
When i) is compared with ii), it shows that it would cost more to buy outside ($151,800) than to produce the part in-house ($149,482).
b) The alternative the company should choose is to produce in-house.
Explanation:
a) The avoidable general overhead of $0.81 was obtained by dividing $5,000 of general overhead by 6,200 units, i.e. $5,000 / 6,200.
b) The depreciation for the special equipment is not included as it is not relevant. It must be incurred no matter the option chosen.
c) The relevant cost of buying the part outside was reduced by $15,600 since this amount would be realized as additional margin with the choice.
d) |n making cost decisions, relevant and avoidable costs are considered. Any cost that will be incurred notwithstanding the choice made is not relevant. Such costs are unavoidable. For example, the depreciation on the equipment.
