Answer to Question #288258 in Accounting for Joseph

Question

Reno Company manufactures part No.498 for use in production line. The

manufacturing costs per unit for 20,000 units of part No.498 are as follows:

Direct materials $6

Direct Manufacturing Labor $30

Variable Manufacturing Overhead $12

Fixed Manufacturing Overhead Allocated $16

Total Manufacturing Costs Per Unit $64

Tray Company has offered to sell 20,000 units of part No.498 to Reno for $60 per unit. Reno

will make the decision to buy the part from Tray if there is an overall savings of at least $25,000

for Reno. If Reno accepts Tray’s offer, $9 per unit of fixed overhead allocated would be totally

eliminated. Furthermore, Reno has determined that the released facilities could be used to save

relevant costs in the manufacture of part No.575. For Reno to achieve an overall saving of

$25,000, how much is the amount of relevant cost that would have to be saved by using the

released facilities in the manufacture of part No.575

Answer 1

Reno total costs

$64\times20 000=1 280 000$

$60\times20 000=1 200 000$

1 280 000-1200 000=600 000

$9\times20000=180 000$

20 000x-1 200 000=25 000

x=61.25

64-61.25=2.75

2.75 is the amount of relevant cost that would have to be saved by using the

released facilities in the manufacture of part No.575