Reference no: EM132596602

Stevenson Motors uses 15 units of Part No. T315 each month in the production of large diesel engines. The cost to manufacture one unit of T315 is presented as follows:

Direct Materials                                            $2,000

Materials handling (10% of direct materials cost) 200

Direct labor                                                   18,000

Manuracturing overhead (150% of direct labor cost) 27,000

Total Manufacturing Cost                                  $47,200

• 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. Stevenson's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Smith Castings, one of Stevenson's reliable vendors, has offered to supply T315 at a unit price of $35,000

Question 1. If Stevenson Motors purchases the 15 T315 units from Smith Castings, the capacity Stevenson used to manufacture these parts would be idle. Should Stevenson make or buy the component? What is the cost difference per unit to buy the part?

Question 2. Assume Stevenson Motors is able to rent all idle capacity for $50,000 per month. If Stevenson decides to purchase the 15 units from Smith Castings, what is Stevenson's change in monthly cost for T315?

Question 3. Assume the rental opportunity does not exist and Stevenson Motors could use the idle capacity to manufacture another product that would contribute $103,000 per month. If Stevenson chooses to manufacture the 15 T315 units in order to maintain quality control, what is Stevenson's opportunity costs?