Question
EON Limited manufactures 30,000 units of part EA5 each year for use on its production line. At this level of activity, the cost per unit
EON Limited manufactures 30,000 units of part EA5 each year for use on its production line. At this level of activity, the cost per unit for part EA5 is:
Direct Materials............................... $3.60
Direct Labour.................................. $10.00
Variable Manufacturing Overhead...$2.40
Fixed Manufacturing Overhead......$9.00
Total cost per part........................ $25.00
An outside supplier has offered to sell 30,000 units of part EA5 each year to EON Limited for $21 per part. If EON Limited accepts this offer, the facilities now being used to manufacture part EA5 could be rented to another company at an annual rental of $80,000. However, EON Limited has determined that two-thirds of the fixed manufacturing overhead being applied to part EA5 would continue even if part EA5 were purchased from the outside supplier.
Required:
(2 marks) - (a) The relevant cost per unit if EON Ltd. produces the product by itself is $ ________/unit unanswered
(2 mark) - (b) The total relevant cost if EON Ltd. produces the product by itself is $ ________ unanswered
(1 mark) - (c) The total relevant cost if EON Ltd. purchases the product from the outside supplier is $ ________ unanswered
(2 marks) - (d) Should EON accept the offer or not? Explain.
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