Question 25

Exercise 10-12 Make or Buy a Component [LO3]

Royal Company manufactures 26,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:

Direct materials	$	4.00
Direct labor		6.00
Variable manufacturing overhead		2.40
Fixed manufacturing overhead		12.00
Total cost per part	$	24.40

An outside supplier has offered to sell 26,000 units of part R-3 each year to Royal Company for $22.40 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $155,000. However, Royal Company has determined that $8 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.

Required:

a.	What is the total relevant cost of making the product?

Total relevant cost of making the product (26,000 units)

$

b.	What is the total relevant cost of buying the product?

Total relevant cost of buying the product (26,000 units)

$

c.	What is the opportunity cost of making instead of buying?

Total opportunity cost

$

d.	How much profits will increase or decrease if the outside suppliers offer is accepted? (Input the amount as a positive value.)

Profits would (Click to select)increasedecrease by

$