The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is:
Direct Materials – $ 1.75
Direct Labor – $ 1.65
Variable Overhead – 0.75
Fixed Overhead – 0.60
The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:
A. $4.75.
B. $4.15.
C. $3.55.
D. $4.05.
Hi, all of the costs add up to A. $4.75 But I don't think that is right. I read relevant costs are costs that are relevant with respect to a particular decision. A relevant cost for a particular decision is one that changes if an alternative course of action is taken and costs that are relevant are those that differ as between the alternatives being considered.
I am lost and confused. Can anyone help or explain more? Thanks.