Please help!! The Ayayai Company manufactures 1,355 units of a part that could b
ID: 2595155 • Letter: P
Question
Please help!!
The Ayayai Company manufactures 1,355 units of a part that could be purchased from an outside supplier for $13 each. Ayayai's costs to manufacture each part are as follows: Direct materials Direct labor Variable manufacturing $3 overhead Fixed manufacturing overhead Total $18 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. (a) Calculate relevant cost to make. Relevent cost to make $ per unit (b) Should Ayayai continue to manufacture the part? LINK TO TEXT LINK TO VIDEO (c) Calculate net cost to buy if Ayayai leases the manufacturing facilities to another company for $6,055 per year Net cost to buy $ (d) Would your answer change if Ayayai could lease the manufacturing facilities to another company for $6,055 per year?Explanation / Answer
Answer :-
A ) Relevant cost are avoidable cost that are incurred when making business decisions i.e. these are the costs which is dependent upon the continuation of the business, if business is discontinued then the relevant expenses ceases to exist.
Therefore, relevant cost to make is :-
Direct labour + Direct material + Variable Manufacturing overhead
= 10 ($)
B ) Now the question requires us to determine whether we should continue the manufacturing process or buy from the market
manufacturing process includes cost of 18 ($) for inhouse production whereas if we buy from outside total cost for the product is
cost to buy + allocated fixed overhead expenses which is unavoidable
13 + 8
=21 ($)
Hence we should continue the production of the product
C ) Net cost to buy if the manufacturing premises are leased out
= toal cost to buy 1355 units - Lease rentals received in the year
1355 units * (13+8) - 6055($)
22400 ($)
D ) Now we have to analyse whether the leasing out of the premises has an impact on our decision of in house production
total cost for in house production = 18 *1355 =24390 ($)
whereas total net cost for purchasing product from market and leasing the premises is as per part C is 22400 ($)
Hence it's better to purchase from outside and lease the manufacturing premises to other company.