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Eric Holder, Inc. manufactures 16,000 units of part Tr-12 each year for use on its production line. At this level of activity, the cost per unit for part Tr-12 is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $ 4.70 6.00 3.10 12.00 Total cost per part $ 25.80 An outside supplier has offered to sell 16,000 units of part Tr-12 each year to Eric Holder, Inc. for $41.50 per part. If Eric Holder, Inc accepts this offer, the facilities now being used to manufacture part Tr-12 could be rented to another company at an annual rental of $364,200. However, Eric Holder, Inc. has determined that $8 of the fixed manufacturing overhead being applied to part Tr-12 would continue even if part Tr-12 were purchased from the outside supplier Required a. What is the total relevant cost of making the product? (Omit the “$” sign in your response.) Total relevant cost of making the product (16,000 units) b. What is the total relevant cost of buying the product? (Omit the “$” sign in your response.) Total relevant cost of buying the product (16,000 units) c. What is the opportunity cost of making instead of buying? (Omit the “$” sign in your response.) Total opportunity cost d. How much profits will increase or decrease if the outside supplier’s offer is accepted? (Input the amount as a positive value. Omit the “S” sign in your response.) Profits would (Click to select) by ▼
Expert Answer
| ERIC HOLDER: | ||
| a) Total relevant cost of making the product: | ||
| The relevant costs, are the costs that can be avoided if the product is not manufactured. | ||
| Direct materials = 16000*$4.70 = | 75200 | |
| Direct labor = 16000*$6.00 = | 96000 | |
| Variable manufacturing overhead = 16000*$3.10 = | 49600 | |
| Traceable fixed overhead = 16000*$4 = | 64000 | |
| Total relevant cost of making the product | 284800 | |
| b) Total relevant cost of buying the product = | ||
| = 16000*$41.50 = | 664000 | |
| c) Total opportunity cost (rent lost on the production facilities) | 364200 | |
| d) Profits will decrease by = 284800+364200-664000 = | -15000 | |
| STEVEN SPIELBERG INC: | ||
| 1) | ||
| Incremental sales revenue = 2000*$19 = | 38000 | |
| Incremental variable expenses = 2000*(1.8+3.00+0.60+1.00) = | 12800 | |
| (in the absence of information, it is assumed that the variable selling and administrative cost would be incurred for this special order also) | ||
| Increase in monthly profits | 25200 | |
| 2) | ||
| The relevant unit cost is the $1 (the variable selling and administrative expenses) | ||
| All other costs are already incurred and would make no difference whether these 500 units | ||
| are sold or not. | ||
