2010-08-02_053429_kirkland - Direct materials Direct...

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Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are: Direct materials $0.60 Direct manufacturing labor 3.00 Variable manufacturing overhead 1.20 Fixed manufacturing overhead 1.60 Total $6.40 Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated. Required: a. What is the relevant per unit cost for the original part?
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Unformatted text preview: Direct materials Direct manufacturing labor Variable manufacturing overhead Avoidable fixed manufacturing overhead Total relevant per unit cost 0.60 3.00 1.20 1.00 5.80 b. Which alternative is best for Kirkland Company? By how much? Purchase price Savings in space Direct materials Direct manufacturing labor Variable overhead Fixed overhead saved Total Make 6,000 30,000 12,000 48,000 Buy 60,000 (9,000) (10,000) 41,000 Effect of buying (60,000) 9,000 6,000 30,000 12,000 10,000 7,000 Buying the parts would be the best alternative by $7,000...
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