Question

The following standard costs pertain to a component part manufactured by ashby company:

direct materials $2
direct labour $5
manufacturing overhead $20
standard cost per unit $27

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

Answer 1

The relevant amount of the standard cost per unit in the decision of whether to make the part internally or buy it from the external supplier would be $19.

Step-by-step explanation:

The relevant amount of the standard cost per unit in the decision of whether to make the part internally or buy it from the external supplier would be $19.

To determine this, we need to consider the avoidable costs in the decision-making process. Direct materials and direct labor are avoidable costs, meaning they can be eliminated if the company decides to buy the part externally. Manufacturing overhead, on the other hand, is a fixed cost and would not change regardless of the decision.

Therefore, the relevant cost per unit would be the sum of direct materials and direct labor, which is $2 + $5 = $7. Adding the relevant cost per unit to the unchanged manufacturing overhead of $20, we get a total relevant cost per unit of $27 - $7 = $20. However, since the external supplier offers the part for $25 per unit, the company would save $5 per unit by buying externally, resulting in a relevant cost per unit of $20 - $5 = $15.