Hi,
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]
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Kishore Kumar N
Bengaluru
Karnataka
India
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Original Message:
Sent: 05-16-2023 05:01 AM
From: Ala Albajaly
Subject: Tough question - Who can help
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
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Ala Albajaly
Director/Manager
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