Yoto Heavy Industrial uses ten units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below:
Direct material ...................$ 2,000
Material handling (20% of direct materials) ...... 400
Direct labor ..................... 16,000
Manufacturing overhead (150% of direct labor) ...... 24,000
Total manufacturing cost ............. $42,400
Material handling, which is not included in the 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. Yoto’s annual manufacturing over-head budget is one-third variable and two-thirds fixed. Workman Hydraulic Company, one of Yoto’s reliable vendors, has offered to supply T305 at a unit price of $ 30,000.
a. If Yoto Heavy Industrial purchases the ten T305 units from Workman Hydraulic Company, the capacity Yoto used to manufacture these parts would be idle. Compute the change in the out-of-pocket cost per unit to Yoto if it decided to purchase the parts from Workman Hydraulic Company.
b. Assume that Yoto Heavy Industrial is able to rent all idle capacity for $ 50,000 per month. If Yoto decides to purchase the ten units from Workman Hydraulic Company, what would be the change in the total monthly cost for T305?