Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available:
Cost to Cardinal to make the part:
$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 4 \
\hline \text { Direct Labour } & \$ 16 \
\hline \text { Variable Manufacturing Overhead } & \$ 8 \
\hline \text { Fixed Manufacturing Overhead } & \$ 10 \
\hline & \$ 38 \
\hline \text { Cost to buy the part from the Oriole Company: } & \$ 36 \
\hline
\end{array}$
Oriole Company has offered to sell this part to Cardinal Company for $36 each.If Cardinal were to buy the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs would continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,what would be the total relevant costs to make the part?
A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

Question

Quizplus · Accepted Answer

The relevant costs to make the part include direct materials, direct labor, variable manufacturing overhead, and the unavoidable portion of fixed manufacturing overhead. Calculate as follows:  Direct Materials: $4 x 20,000 = $80,000  Direct Labour: $16 x 20,000 = $320,000  Variable Manufacturing Overhead: $8 x 20,000 = $160,000  Unavoidable Fixed Manufacturing Overhead: 60% of $10 x 20,000 = $120,000  Total relevant costs = $80,000 + $320,000 + $160,000 + $120,000 = $680,000.  However, the correct choice is $640,000, indicating a calculation error in the explanation. The correct calculation should exclude the avoidable portion of fixed overhead, leading to $640,000.

Cardinal Company Needs 20,000 Units of a Certain Part to Use