Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 unit...
Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 units are produced, the costs per unit are:
Direct materials $15
Direct manufacturing labor 60
Variable manufacturing overhead 26
Fixed manufacturing overhead 32
Total $133
Monty Company has offered to sell to Lewis Auto Company 10,000 units of the part for $122 per unit. The plant facilities could be used to manufacture another item at a savings of $182,000 if Lewis accepts the offer. In addition, $24 per unit of fixed manufacturing overhead on the original part would be eliminated.
Required: Which alternative is best for Lewis Auto Company? By how much – please show your work!
Homework Answers
Relevant cost = Direct Material + direct manufacturing +
Variable manufacturing overhead + Relevant fixed cost
= 15+60+26+20
= 122
Cost if the part is bought
Purchase price 10,000*122 = 1,220,000
Add: Unavoidable fixed cost 10,000*32 = 320,000 = 1,540,000
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