Question

Preston Industries, Inc. currently manufactures part QX100, which is used in several products produced by the company. Monthly production costs for 10,000 units of QX100 are as follows: Direct materials$82,000 Direct labor$13,000 Variable overhead costs$40,000 Fixed overhead costs$44,000 Total manufacturing costs$179,000 Accounting has estimated that 20% of the fixed overhead costs currently assigned to QX100 would not be needed if the company chose to purchase the part from an outside supplier. Preston currently has the option of purchasing the part from an outside supplier at $16.00 per unit. If the company accepts the offer from the outside supplier, the monthly avoidable costs (that is, costs that would no longer be incurred) would be:

Answer 1

Answer:

$143,800

Explanation:

Particulars                                             Amount

Direct materials                                     $82,000  

Direct labor                                            $13,000

Variable manufacturing costs               $40,000

Fixed overhead cost (44,000*20%)     $8,800  

Total monthly avoidable costs            $143,800

If the company accepts the offer from the outside supplier, the monthly avoidable costs would be $143,800.