QUESTION: 170 Topic 3: Part 3 Sec Three (106 to 176)

The opportunity cost of making a component part in a factory with no excess capacity is the

Variable manufacturing cost of the component.
Fixed manufacturing cost of the component.
Cost of the production given up in order to manufacture the component.
Net benefit given up from the best alternative use of the capacity.

Answer(s): D

Explanation:

An opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource. Thus, in a factory operating at full capacity, the opportunity cost of making a component is the benefit given up by not selecting an alternative use of the plant capacity.

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QUESTION: 171 Topic 3: Part 3 Sec Three (106 to 176)

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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:

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.If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of- pocket cost per unit of T305 would

Decrease $6,400.
Increase $3,600.
Increase $9,600.
Decrease $12,400.

Answer(s): C

Explanation:

The out-of-pocket cost of making the part equals the total manufacturing cost minus the fixed overhead, or $26400 {$42,400 -[(2 + 3) x $24,000]}. The cost of the component consists of the $30,000 purchase price plus the $6,000 (20% of cost) of variable receiving costs, or a total of $36,000. Thus, unit out-of-pocket cost would increase by $9,600 if the components were purchased.

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QUESTION: 172 Topic 3: Part 3 Sec Three (106 to 176)

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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:

Materials handling, which is not included in manufacturing overhead, represents the direct van able 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 Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the 10 units from Simpson Castings, Richardson's monthly cost for T305 would

Decrease $14,000.
Increase $46,000.
Decrease $64,000.
Increase $96,000.

Answer(s): B

Explanation:

For 10 components, the total cost increase would be $96,000, but the $50,000 rental would reduce the net increase to $46 J00.

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QUESTION: 173 Topic 3: Part 3 Sec Three (106 to 176)

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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:

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

$68,000.
$88,000.
$8,000.
$(96,000).

Answer(s): C

Explanation:

For 10 units, the additional cost of purchasing is $96,000. However, the net effect of purchasing is a gain of $8,000($104,000 contribution from making another product - $96,000). Opportunity cost is the benefit from the next best alternative use of the resources. Hence, the company's opportunity cost of making the part is $8,000.

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QUESTION: 170 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 171 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 172 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 173 Topic 3: Part 3 Sec Three (106 to 176)

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