Question

13-23 The Reno Company manufactures Part No. 498...

Smaller Manufacturing Co. has offered to sell American 50,000 bearin of $18 per unit. If the offer is accepted, American can terminate its le existing facilities at an annual savings of $150,000. In addition, $4 per uncertain overhead utilized for manufacture of the bearing would be eliminated. ngs at a ase on Required: Using the relevant cost approach, determine if American should make bearings (b) What qualitative factor(s) may affect the decision? the Cost Savings from External Purchase The Reno Company manufactures Part No. 498 for use in its production c cost per unit for 20,000 units of Part No. 498 is as follows: 13-23 cycle. The Direct materials. Direct labor Variable overhead..12 Fixed overhead applie.. 16 $64 The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if it produces a net incremental benefit of

Answer 1

cost to manufacture	20000*64	1280000
cost to purchase	20000*60	1200000
unavoidable cost (16-9) =7	20000*7	140000
total cost to purchase		1340000
incremental cost on purchase	1340000-1280000	60000
incremental profit required		25000
saving to be attained in the production of part no 575		85000