CMA Study Group

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  • 1.  Tough question - Who can help

    Posted 05-16-2023 05:02 AM

    Hi all, 

    Why the question considered fixed cost as relevant even the question stated that only 20% of fixed cost is avoidable.  

    H Corp. produces premium office chairs. Due to a recent change in market share, H must decide whether to make or buy an order of 1,000 chairs. The materials cost of producing a chair is $20 per pound, the cost of direct labor is $40 per direct labor hour, and manufacturing overhead (100% variable) is allocated at a rate of $10 per chair. Fixed costs for the year are $5 per chair, of which 20% are avoidable. Each chair requires 2 pounds of materials and 1 hour of direct labor to complete. Assuming that H has no excess capacity, what are the relevant costs per chair?

    Thank you in advance 

    Ala Albajaly

  • 2.  RE: Tough question - Who can help

    Posted 05-16-2023 06:42 AM

    Given that  there is no Excess capacity, the opportunity cost of displaced production of office chairs is a relevant cost , since this will alter the decision in favor of buying it.
    Hence, it is included as relevant cost.
    Therefore, the relevant cost is $95 [ 2X$20 + 1X$40 +$5]

    Kishore Kumar N