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Preston Industries, Inc
Preston Industries, Inc. currently manufactures part QX100, which is used in several products produced by the company. Monthly production costs for 10,000 units of QX100 are as follows:
Direct materials$84,000Direct labor$15,000Variable overhead costs$45,000Fixed overhead costs$50,000Total manufacturing costs$194,000
Accounting has estimated that 20% of the fixed overhead costs currently assigned to QX100 would not be needed if the company chose to purchase the part from an outside supplier. Preston currently has the option of purchasing the part from an outside supplier at $16.00 per unit.
If the company accepts the offer from the outside supplier, the monthly avoidable costs (that is, costs that would no longer be incurred) would be:
Expert Solution
Avoidable Cost if Accepted the Outside Supplies
| Direct Materials | $84,000 |
| Direct labor | $15,000 |
| Variable Overhead Cost | $45,000 |
| Fixed Overhead Cost (50,000*20%) | $ 10,000 |
| Total Avoidable Cost |
$154,000 |
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