Q 10:

Sohar Company manufactures 10,000 units of a spare part ALFA each year for use on its production line. At this level of activity, the cost per unit for part ALFA is as follows:

Direct materials $ 2.40

Direct labor 3.50

Variable manufacturing overhead 1.60

Fixed manufacturing overhead 5.00

Total cost per part $12.50

An outside supplier has offered to sell 15,000 units of spare part ALFA each year to Sohar Company for $11.75 per part. If Sohar Company accepts this offer, the facilities now being used to manufacture ALFA could be rented to another company at an annual rental of $75,000.

However, Sohar Company has determined that $3 of the fixed manufacturing overhead being applied to part ALFA would continue even if part ALFA were purchased from the outside supplier.

Required:

a) Prepare computations showing how much profits will increase or decrease if the outside suppliers offer is accepted.

b) Also mention which cost is opportunity cost and which cost is irrelevant cost