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Royal Company manufactures 29,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:
Direct material
$4.50
Direct labor
6.00
Variable manufacturing overhead
3.40
Fixed manufacturing overhead
9.00
Total cost per part
$22.90
An outside supplier has offered to sell 29,000 units of part R-3 each year to Royal Company for $19.90 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $88,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
Required:
a. What is the total relevant cost of making the product?
b. What is the total relevant cost of buying the product?
c. What is the opportunity cost of making instead of buying?
d. How much profits will increase or decrease if the outside supplier's offer is accepted?
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