Reuben's Deli currently makes rolls for deli sandwiches it produces. It uses 30,000 rolls annually in the production of deli sandwiches. The costs to make the rolls are: Materials $0.24 per roll 0.40 per roll 0.16 per roll 0.20 per roll Labor Variable Overhead Fixed Overhead A potential supplier has offered to sell Reuben the rolls for $0.90 each. If the rolls are purchased, 30% of the fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be? Increase in profit of $1,600 if he buys the rolls Increase in profit of $1,200 if he buys the rolls Decline in profit of $1,200 if he buys the rolls Decline in profit of $1,600 if he buys the rolls
A potential supplier has offered to sell Reuben the rolls for $0.90 each. If the rolls are purchased, 30% of the fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be?
Increase in profit of $1,600 if he buys the rolls
Increase in profit of $1,200 if he buys the rolls
Decline in profit of $1,200 if he buys the rolls
Decline in profit of $1,600 if he buys the rolls
Relevant cost is the cost that is different between different alternatives. This cost is considered useful for making make or buy decision, special order decision, etc. It is the sum of variable costs incurred, avoidable fixed costs and opportunity costs. The opportunity cost is the income forgone from next best alternative due to acceptance of an alternative.
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