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Munoz Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Munoz produces and sells only 7,000 bikes each year. Due to the low volume of activity, Munoz is unable to obtain the economies of scale that larger producers achieve. For example, Munoz could buy the handlebars for $33 each; they cost $36 each to make. The following is a detailed breakdown of current production costs:

Item Unit Cost Total
Unit-level costs
Materials $17 $134,300
Labor 11 86,900
Overhead 3 23,700
Allocated facility-level costs 9 71,100
Total $40 $316,000
After seeing these figures, Munoz’s president remarked that it would be foolish for the company to continue to produce the handlebars at $40 each when it can buy them for $37 each.Calculate the total relevant cost per unit and total.

Respuesta :

Answer:

The relevant of producing the handlebar is $31 per unit.

Explanation:

The submission by Munoz's President is faulty because in calculating the cost of one unit of handlebar at $40 ,allocated facility-level costs were added at $9 per unit.This cost is not relevant for the decision at hand as it would incurred regardless of whether or not the handlebar is produced in-house.

As a result, relevant cost per unit is total cost per unit less irrelevant of $9.

That gives:$40-$9=$31

Without mincing words,$31 is the relevant cost per unit.

The relevant can alternatively be calculated as found in the attached.

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