The Camel Company produces 10,000 units of item Roto 454 annually at a total cost of $190,000.
Direct materials $ 20,000
Direct labor 55,000
Variable overhead 45,000
Fixed overhead 70,000
Total $ 190,000
The Yukon Company has offered to supply 10,000 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $15,000 per year.
Required:
1. What are the relevant costs for the "make" alternative?

$175,000

Explanation:

Given that,

Direct materials = $ 20,000

Direct labor = $55,000

Variable overhead = $45,000

Fixed overhead = $70,000

Number of units offered = 10,000

Rent Revenue = $15,000

Avoidable Fixed Overhead:

= Fixed overhead per unit × Number of units offered

= $4 × 10,000

= $40,000

Relevant Costs:

= Direct Materials + Direct Labor + Variable Overhead + Avoidable Fixed Overhead + Rent Revenue

= $20,000  + $55,000  + $45,000  + $40,000 + $15,000

= $175,000

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