Question

Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is: direct material 4.80 direct labor 7.00 variable manufacturing overhead 3.20 fixed manufacturing overhead 10.00 total cost per part 25.00 An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.

Answer 1

Step 1 Workings

Step 2 Decision Whether to Make or Buy

The royal company should buy/ accept the offer of the supplier since it will lead to a net incremental Benefit of $60,000.