Question

Exercise 8-8 The Swirty Company manufactures 1.420 units of a part that could be purchased from an outside supplier for $12 each. Swifty's costs to manufacture each part are as follows: $2 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total 3 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. (a) Calculate relevant cost to make. Relevent cost to make $ per unit (b) Should Swifty continue to manufacture the part? (c) Calculate net cost to buy if Swifty leases the manufacturing facilities to another company for $6,550 per year. Net cost to buy $ (d) Would your answer change if Swifty could lease the manufacturing facilities to another company for $6,550 per year?

Answer 1

1 a. 2 Direct materials 3 Direct labor 4 Variable manufacturing overhead 5 Relevant cost to make $9 per unit 7 b. 8 Yes The relevant cost to make is $9 per unit which is lower than cost of purchasing each 9 unit i.e. $12. Thus, it is better to continue to manufacture the part. 10 11 c. 12 Net cost to buy $10,490 13 14 d. 15 Net cost to buy $10.490 16 Relevant cost to make $12,780 17 18 Yes Net cost to buy ($10.490) is lower than relevant cost to make (S12,780). Thus, it 19 is better to buy the part. *Final answers are highlighted with yellow color.

Calculations are shown below: 1 a. 2 Direct materials 3 Direct labor 4 Variable manufacturing overhead 5 Relevant cost to make =SUM(B2:B4) per unit 7 b. Yes The relevant cost to make is $9 per unit which is lower than cost of purchasing 9 each unit i.e. $12. Thus, it is better to continue to manufacture the part. 10 12 Net cost to buy =(1420*12)-6550 13 14 d. 15 Net cost to buy =B12 16 Relevant cost to make =1420*B5 17 18 Yes Net cost to buy ($10.490) is lower than relevant cost to make ($12,780). Thus, 19 it is better to buy the part.