The following standard costs pertain to a component part manufactured by Ashby Company:
$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 2 \
\hline \text { Direct Labour } & \$ 5 \
\hline \text { Manufacturing Overhead } & \$ 20 \
\hline \text { Standard Cost per Unit } & \$ 27 \
\hline
\end{array}$
The company can purchase the part from an outside supplier for $25 per unit.The manufacturing overhead is 60% fixed,and this fixed portion would not be affected by this decision.Assume that direct labour is an avoidable cost in this decision.What would be the relevant amount of the standard cost per unit in a decision of whether to make the part internally or buy it from the external supplier?
A) $2.
B) $15.
C) $19.
D) $27.

Question

Quizplus · Accepted Answer

The relevant costs for making the decision include only the costs that would change if the part were purchased instead of made. This includes direct materials ($2), direct labor ($5), and the variable portion of manufacturing overhead. Since 60% of the overhead is fixed, 40% is variable. The variable portion of the overhead is 40% of $20 = $8. Therefore, the relevant cost is $2 (direct materials) + $5 (direct labor) + $8 (variable overhead) = $15. Fixed costs are not relevant since they do not change with the decision.

The Following Standard Costs Pertain to a Component Part Manufactured