Outsource a Component; Relevant Costs, Opportunity Costs, and Quality Control
Chenango Industries uses 10 units of part JR63 each month in the production of radar equipment. The cost of manufacturing one unit of JR63 is the following:
Direct material | $1,000 |
Material handling(20% of direct-material cost) | 200 |
Direct labor | 8,000 |
Manufacturing overhead (150% of direct labor) | 12,000 |
Total manufacturing cost | $21,000 |
Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Chenango Industries’ annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Chenango Industries’ reliable vendors, has offered to supply part number JR63, at a unit price of $15,000.
Required:
1. If Chenango Industries purchases the JR63 units from Scott, the capacity Chenango Industries used to manufacture these parts would be idle. Should Chenango Industries decide to purchase the parts from Scott, the unit cost of JR63 would increase (or decrease) by what amount?
2. Assume Chenango Industries is able to rent out all its idle capacity for $25,000 per month. If Chenango Industries decides to purchase the 10 units from Scott Supply, Chenango’s monthly cost for JR63 would increase (or decrease)by what amount?
3. Assume that Chenango Industries does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $52,000 per month. If Chenango’s management elects to manufacture JR63 in order to maintain quality control, what is the net amount of Chenango’s cost from using the space to manufacture part JR63?
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