Cleese Company currently purchases a finished part from Idle Company,but is considering using it excess capacity to make the part.Normal capacity is 20,000 hours,but Cleese is currently running at 17,000 hours.Details about budgeted factory overhead follow: Direct costs to manufacture 1,000 parts in-house would be: The relevant unit cost Cleese should use to decide whether to make or buy the part is:
A)$31.00
B)$24.50
C)$27.00
D)$26.00

Question

Cleese Company currently purchases a finished part from Idle Company,but is considering using it excess capacity to make the part.Normal capacity is 20,000 hours,but Cleese is currently running at 17,000 hours.Details about budgeted factory overhead follow:  Direct costs to manufacture 1,000 parts in-house would be:  The relevant unit cost Cleese should use to decide whether to make or buy the part is:
A)$31.00 
B)$24.50 
C)$27.00 
D)$26.00

Quizplus · Accepted Answer

To determine the relevant unit cost, we need to calculate the cost per unit for making the part in-house and compare it to the cost of buying it from Idle Company.

The direct costs to manufacture 1,000 parts in-house are $20,000 (direct materials) + $13,000 (direct labor) + $8,000 (variable overhead) + $6,000 (fixed overhead allocated based on normal capacity) = $47,000.

Therefore, the cost per unit for making the part in-house is $47,000/1,000 = $47.

If Cleese buys the part from Idle Company, they would pay $31 per unit.

Since $31 is less than $47, Cleese should buy the part from Idle Company to save costs.

Therefore, the relevant unit cost is $31 per unit.

The only answer choice that matches this calculation is C.

Cleese Company Currently Purchases a Finished Part from Idle Company,but