I have reviewed the answer for PuppyGrowL inChegg website. Why $15 variable manu
ID: 2513099 • Letter: I
Question
I have reviewed the answer for PuppyGrowL inChegg website.
Why $15 variable manufacturing costs is not included in the special order. In my opinion; that should be included; the relevant cost should not be $65,000-
The answers provided by Chegg for Puppy Grow Ltd for part a). Chegg provided $65,000 as relevant cost as:
a) contribution foregone for 3,000 kgs @$21- = $63,000
b) one time packing $2000-
c) then total is $65,000-
My question is; the special order is 5,000 kg; there should be additional manufacturing cost @$15/kg for additional 2,000 kgs
Thus, 2,000 x $15 = $30,000 should be added to the relevant cost. Total relevant cost should be $95,000 instead of $65,000.
Am I correct?
Explanation / Answer
Yes you are correct.
Relevant cost for decision making inlcudes:
1. Manufacturing Variable cost
2. Other variable cost if applicable
3. Opportunity cost/Benefits forgone/COntribution lost or foregone.
4. ANy specific cost related to that order/offer.
According to the data provided to you, if Variable cost of producing a unit is indeed $15 as you say, then for 2000 units order, 2000 x $15 = $30,000 should also be included in the relevant cost for that offer/job/order.
However, if the raw material is already purchased and available in 5000 kg, then its purchase cost of $15 will not be considered.