Question

The following standard costs pertain to a component part manufactured by Ashby Company:

Direct Materials	$2
Direct Labour	$5
Manufacturing Overhead	$20
Standard Cost per Unit	$27

The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed, and this fixed portion would not be affected by this decision. Assume that direct labour is an avoidable cost in this decision. What would be the relevant amount of the standard cost per unit in a decision of whether to make the part internally or buy it from the external supplier?

Multiple Choice

• $2.

• $15.

• $19.

• $27.

Answer 1

Correct answer--------$15

Working

Per Unit Cost
	Make
Direct material	$                2.00
Direct labor	$                5.00
Variable Overhead (20 x 40%)	$                8.00
Total relevant Cost	$              15.00

Unavoidable fixed overhead will not be considered for this decision making since they are incurred in both make and buy alternative.