Question

The managerial accountant at Sellers Manufacturing produces a product, Part Z that the company uses to make multiple products at its facility in Virginia. The managerial accountant reported to the operations manager that 12% of its fixed overhead costs assigned to Part Z will not continue if Sellers Manufacturing outsources the production of Product Z at $44 per unit to Manufacturing World. The managerial accountant reported that to produce 1,200 units of Product Z, Sellers Manufacturing incurs the following costs: Sellers Manufacturing Monthly Analysis: Part Z Direct Materials Direct Labor Variable overhead costs Fixed overhead costs Should Sellers Manufacturing produce Part Z or outsource it to Manufacturing World?

Answer 1

total cost to purchase 1200 units = purchase price * number of units

=>1200 units *$44

=>$52,800.

relevant cost to manufacture 1200 units;

direct materials	28,000
direct labor	6,400
variable overhead costs	18,000
fixed overhead costs (11,500 *12% relevant)	1,380
relevant cost to manufacture	$53,780

So it would be better to purchase, since the cost of purchase is $52,800 which is lower than the relevant manufacturing cost of $53,780 .