Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are
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Question:
Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:
Direct materials $12
Direct manufacturing labor 60
Variable manufacturing overhead 24
Fixed manufacturing overhead 32
Total $128
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.
- What is the relevant per unit cost for the original part?
- Which alternative is best for Lewis Auto Company? By how much?
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