GMH Company manufactures 100,000 units of Part X annually for use in one of its main products

Management Jan 16, 2021

GMH Company manufactures 100,000 units of Part X annually for use in one of its main products. The total manufacturing cost for 100,000 units of Part X is as follows:

Direct materials $120,000

Direct labor 80,000

Variable overhead 40,000

Fixed overhead 160,000

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Total cost $400,000

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Selin Company has offered to sell GMH 100,000 units of Part X per year. If GMH accepts this offer, the facilities used to produce Part X can be used in the production of other components. This change would save GMH $10,000 in rent for the leased production facility used at present to support the production of other components. What is the amount of relevant costs for this make-or-buy decision?

Expert Solution

Computation of Amount of Relevant Costs for this make-or-buy decision:

Direct materials = $120,000

Direct labor = $80,000

Variable overhead = $40,000

Avoidable Rent = $10,000

Total amount of relevant costs = $250,000

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