Kirkland Company Manufactures a Part for Use in Its Production

question 149

Essay

Kirkland Company manufactures a part for use in its production of hats.When 10,000 items are produced,the costs per unit are:
$\begin{array}{lr}\text { Direct materials } & \$ 0.60 \\\text { Direct manufacturing labor } & 3.00 \\\text { Variable manufacturing overhead } & 1.20 \\\text { Fixed manufacturing overhead } & \underline{1.60}\\\text { Total }&\$6.40\end{array}$ Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit.The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer.In addition,$1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
a.What is the relevant per unit cost for the original part?
b.Which alternative is best for Kirkland Company? By how much?

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Definitions:

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