Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:
Direct materials $2000
Materials handling (20% of direct materials cost) 400
Direct labor 16000
Manufacturing overhead (150% of direct labor) 24000
Total manufacturing cost 42400
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed Simpson Castings one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000. Assume the rental opportunity does not exist and Richardson Motors could use the idle capacity to manufacture another product that would contribute $104,000 per month. If Richardson chooses to manufacture the ten T305 units in order to maintain quality control, Richardson’s opportunity cost is