Basile Corporation has budgeted sales of 36,000 units, target ending finished goods inventory of 6,000 units, and beginning fini
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Answer:
The financial drawback amounts to 138,600.
Explanation:
The allocated and depreciation costs are inevitable and thus should be regarded as expenses for the purchase option.
Additionally, any income from the extra segment is applicable only to the purchase option.
The avoidable costs include:
Direct Materials
Direct Labor
Variable overhead
Supervisor's salary
These costs are absent in the purchase scenario.
Answer:
additional revenue = $26,250
relevant costs:
direct materials = 350 x $82 = $28,700
direct labor = 525 x $15 = $7,875
setup hours = 1 x $5 = $5
inspection costs = 20 x $5 = $100
machining = 175 x $3 = $525
total relevant costs = $37,205
1) change in income if order is accepted:
total revenue - total relevant costs = $26,250 - $37,205 = -$10,955
the company will incur a loss of $10,955 if the order is approved.
2) if the cost of direct materials is decreased by $13 per unit = $13 x 350 = $4,550, and if direct labor can be reduced by 0.5 hours per unit = 175 hours (= 175 x $15 = $2,625) ⇒ total relevant costs will be lowered by $7,175.
It results in a $3,780 (= $10,955 - $7,175) loss if the special order is accepted.
