Kelly Motor Company manufactures 7,500 units of a particular part. The costs to manufacture the part are
Question:
Kelly Motor Company manufactures 7,500 units of a particular part. The costs to manufacture the part are as
follows:
Direct materials................................................... $22,500 (22,500/7500 = 3*)
Direct labor ......................................................... $30,000 (30,000/7500 = 4*)
Variable manufacturing overhead........................ $7,500 (7,500/7500 = 1*)
Fixed manufacturing overhead............................. $60,000 (60,000/7500 = 8*)
Total...........................................................................$120,000 (120,000/7500 = 16*)
*cost per unit assuming 7500 units produced
Kelly can buy 7,500 units of the part from Diva for $15 per unit. Kelly has determined that 75 percent of the
fixed manufacturing overhead will continue even if the part is purchased from Diva. How much could Kelly pay
Diva for the part (per unit) before Kelly would be worse off than if they continued to manufacture the part
internally? (i.e what is the relevant cost of manufacturing the part?)