Question
Gerenuk Company currently produces a key part at a total cost of $100,000. Annual variable costs are $30,000. Of the annual fixed costs, $10,000 relate
Gerenuk Company currently produces a key part at a total cost of $100,000. Annual variable costs are $30,000. Of the annual fixed costs, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part annually for $70,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $40,000 per year. Alternatively, the facilities could be rented out at $35,000 per year. Given all of these alternatives, what is Gerenuk Company's lowest net relevant cost for the parts?
You must show your calculations.
Hint: Your three alternatives are (1) make the part, (2) buy the part and manufacture a new product, (3) buy the part and rent out the facilities.
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