Rusa Company manufactures a part for use in its production of hats. When 10,000 itemsare produced, the costs per unit are:RMDirect materials0.75Direct manufacturing laborVariable manufacturing overheadFixed manufacturing overhcadTotal3.001.501.606.85Axe Company has offered to sell to Rusa Company 10,000 units of the part for RM6.00per unit. The plant facilities could be used to manufacture another item at a savings ofRM9,000 if Rusa accepts the offer. In addition, RM1.00 per unit of fixed manufacturingoverhead on the original item would be eliminated.Required:i) What is the relevant per unit cost for the original part?ii) Which alternative is the best for Rusa Company? By how much?iii) What are opportunity costs? Explain why opportunity costs are not recorded infinancial accounting systems.

Relevant cost are avoidable cost and are affected by specific business decisions. In make or buy…

s per unit are: RM 0.75 ing labor zuring overhead 1.50 ng overhcad 3.00 1.60 6.85 fered to sell to Rusa Company 10,000 units of th cilities could be used to manufacture another ite epts the offer. In addition, RM1.00 per unit of fir al item would be eliminated.

s per unit are: RM 0.75 ing labor zuring overhead 1.50 ng overhcad 3.00 1.60 6.85 fered to sell to Rusa Company 10,000 units of th cilities could be used to manufacture another ite epts the offer. In addition, RM1.00 per unit of fir al item would be eliminated.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Rusa Company manufactures a part for use in its production of hats. When 10,000 items
are produced, the costs per unit are:
RM
Direct materials
0.75
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhcad
Total
3.00
1.50
1.60
6.85
Axe Company has offered to sell to Rusa Company 10,000 units of the part for RM6.00
per unit. The plant facilities could be used to manufacture another item at a savings of
RM9,000 if Rusa accepts the offer. In addition, RM1.00 per unit of fixed manufacturing
overhead on the original item would be eliminated.
Required:
i) What is the relevant per unit cost for the original part?
ii) Which alternative is the best for Rusa Company? By how much?
iii) What are opportunity costs? Explain why opportunity costs are not recorded in
financial accounting systems.

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