CASE 1

KIRKLAND COMPANY

Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:

Direct materials

0.60

Direct manufacturing labor

3.00

Variable manufacturing overhead

1.20

Fixed manufacturing overhead

1.60

Total

6.40

Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit.

The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer.

In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.

(HINT: $.60 will NOT differ between these two alternatives.)

a. What is the relevant per unit cost for the original part?

b.

Which alternative is best for Kirkland Company? By how much?

Include qualitative factors in your explanation of your decision-making for this case.