Royal Company manufactures 20,000 units of part R 3 each year for use on its production line. At this level of activity, the cost per unit for part R 3 is:
| Direct materials | $ | 4.80 |
| Direct labor | 7.00 | |
| Variable manufacturing overhead | 3.20 | |
| Fixed manufacturing overhead | 10.00 | |
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| Total cost per part | $ | 25.00 |
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An outside supplier has offered to sell 20,000 units of part R 3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R 3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R 3 would continue even if part R 3 were purchased from the outside supplier. |
| Required: |
| a. |
What is the total relevant cost of making the product? (Omit the “$” sign in your response.) |
| Total relevant cost of making the product (20,000 units) | $ |
| b. |
What is the total relevant cost of buying the product? (Omit the “$” sign in your response.) |
| Total relevant cost of buying the product (20,000 units) | $ |
| c. | What is the opportunity cost of making instead of buying? (Omit the “$” sign in your response.) |
| Total opportunity cost | $ |
| d. | How much profits will increase or decrease if the outside supplier%u2019s offer is accepted? (Input the amount as a positive value. Omit the “$” sign in your response.) |
| Profits would by | $ |