Ask the Accounting Community

  • 1.  opportunity cost

    Posted 06-20-2013 12:41 PM

    Richardson Motors uses ten units of Part Number T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below.



    Material 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

    the answer is 8,000$ ???


    -------------------------------------------
    Ahmed Abd El Aziz
    Director/Manager
    Ishraqaat Al-Taqwwa Group
    Kuwait
    Kuwait
    -------------------------------------------


  • 2.  RE:opportunity cost

    Posted 06-20-2013 03:15 PM
    Ahmed,

    The cost data seems to have been missed here. Can you please repost and provide the complete data?


    -------------------------------------------
    Angel Secerio CMA, CPA
    Director/Manager
    Insights Financial Review Services Inc
    Makati City
    Philippines
    -------------------------------------------








  • 3.  RE:opportunity cost

    Posted 06-20-2013 03:25 PM
    dear angle

    kindly find Data below

    -------------------------------------------
    Ahmed Abd El Aziz
    Director/Manager
    Ishraqaat Al-Taqwwa Group
    Kuwait
    Kuwait
    -------------------------------------------








  • 4.  RE:opportunity cost

    Posted 06-21-2013 01:09 AM
    Ahmed,

    Below is the proposed solution for your reference.

    Richardson Motors (Make or Buy)

    The "Make or Buy" problem concerns analysis of relevant costs. Hence, irrelevant costs, like fixed overhead, should be ignored.

    "Make" option
    To produce one unit of T305, Richardson's relevant costs are as follows:
    Materials cost ...................................................... $ 2,000
    Handling costs (20%) .........................................     400
    Direct labor .........................................................   16,000
    Variable MOH (1/3 X $24,000) .......................     8,000
    Total relevant product cost/unit ................... $ 26,400
    Add: Opportunity cost/unit of T305 ............    10,400 ($104,000 / 10 produced per month)
    Total relevant cost (Make option) ........ $ 36,800

    "Buy" option
    To purchase one unit of T305 from a supplier, the relevant costs are:
    Purchase price per unit ................................... $ 30,000
    Handling charge (20% of materials cost) ..       6,000 (20% X $30,000)
    Total relevant cost (Buy option) .........  $ 36,000

    The opportunity cost of choosing to produce instead of buying from outside is:

    Make option ................................................................ $36,800
    Buy option .................................................................    36,000
    Incremental/Opportunity cost per unit of T305  $       800
    Number of units produced in a month ............... X)        10 units

    Opportunity Cost if "Make" option is chosen ... $ 8,000

    I hope this helps.


    -------------------------------------------
    Angel Secerio CMA, CPA
    Director/Manager
    Insights Financial Review Services Inc
    Makati City
    Philippines
    -------------------------------------------








  • 5.  RE:opportunity cost

    Posted 06-21-2013 01:10 AM
    Hi,

    $8000 is correct answer, here is calculation-

    a) Cost per unit to RM is already given 42,400 $/Unit so for 10 units amount comes to $424,000.
    b) If RM outsource it, they need to pay [$30,000 + 20%*(30,000)+2/3*(24,000)]*10 - $104,000= $416,000

    Hence opportunity cost of $8,000.
     
    -------------------------------------------
    Sant Tanwar
    Analyst
    Sirocco FZCO
    Dubai
    United Arab Emirates
    -------------------------------------------