Question

The following standard costs pertain to a component part manufactured by Bor Company: An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to "make or buy," what is the relevant unit cost to make the part internally?

Answer 1

$30

Explanation:

The computation of relevant unit cost to make the part internally is shown below:-

Relevant cost of making part = Direct material + Direct labor + Manufacturing overhead

= $4 + $10 + ($40 - (100% - $60%)

= $4 + $10 + ($40 - 40%)

= $4 + $10 + $16

= $30

So, for computing the relevant unit cost to make the part internally we simply applied the above formula.