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Chapter 23: Q8QS (page 1050)

Xia Co. currently buys a component part for \(5 per unit. Xia believes that making the part would require\)2.25 per direct materials and \(1.00 per unit of direct labor. Xia allocates overhead using a predeterminedoverhead rate of 200% of direct labor cost. Xia estimates an incremental overhead rate of \)0.75per unit to make the part. Should Xia make or buy the par.

Short Answer

Expert verified

The cost of manufacturing the part is $4.

Step by step solution

01

Definition of relevant cost

The relevant cost is the cost that is relevant to the decision.

02

Computation of relevant cost

Relevant Cost:

Direct Materials

$2.25

Direct Labour

$1

IncrementalOverhead

$0.75

Relevant Cost

$4

In relevant costs, predetermined overheads are not included.

The company has to make the part because of the cost of making $1 less than buying the part.

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Most popular questions from this chapter

Bert Asiago, a salesperson for Convertco, received an order from a potential new customer for

50,000 units of Convertco’s single product at a price \(25 below its regular selling price of \)65. Asiago knows

that Convertco has the capacity to produce this order without affecting regular sales. He has spoken to

Convertco’s

controller, Bia Morgan, who has informed Asiago that at the \(40 selling price, Convertco will

not be covering its variable costs of \)42 for the product, and she recommends the order not be accepted.

Asiago knows that variable costs include his sales commission of \(4 per unit. If he accepts a \)2 per unit

commission, the sale will produce a contribution margin of zero. Asiago is eager to get the new customer

because he believes that this could lead to the new customer becoming a regular customer.

Required

1. Determine the contribution margin per unit on the order as determined by the controller.

2. Determine the contribution margin per unit on the order as determined by Asiago if he takes the lower

commission.

3. Do you recommend Convertco accept the special order? What factors must management consider?

Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are \(1.95 per unit, fixed costs related to making this component are \)65,000 per year, and allocated fixed costs are \(58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for \)3.50 per unit. Should it continue to manufacture the component, or should it buy this component from the outside supplier? Support your decision with analysis of the data provided

A company has already incurred \(5,000 of costs in producing 6,000 units of Product XY. Product XY can be sold as is for \)15 per unit. Instead, the company could incur further processing costs of \(8 per unit and sell the resulting product for \)21 per unit. Should the company sell Product XY as is or process it further?

Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of \(22 each. This year’s model is superior to last year’s, and the 7,000 units cannot be sold at last year’s regular selling price of \)35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for \(8 each or (2) they can be reworked at a cost of \)125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Assume that Samsung manufactures and sells 60,000 units of a product at \(11,000 per unit in domestic markets. It costs \)6,000 per unit to manufacture (\(4,000 variable cost per unit, \)2,000 fixed cost per unit). Can you describe a situation under which the company is willing to sell an additional 8,000 units of the product in an international market at $5,000 per unit?
See all solutions

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