Problem - Dentech, Inc uses 10 units of part RM67 each month in the production of dentistry equipment. The cost of manufacturing one unit of RM67 is the following:
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Direct material
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$3,000
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Material handling (20% of DM cost)
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$600
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Direct labor
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$24,000
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MOH (150% of DL)
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$36,000
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Total manf costs
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$63,600
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Material handling represents the direct variable costs of the receiving department that are applied to DM and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Dentech's annual manufacturing overhead budget is 1/3 variable and 2/3 fixed. Scott Supply, one of Dentech's reliable vendors, has offered to supply part RM67 at a unit price of $45,000.
1. If Dentech purchases the RM67 units from Scott, the capacity Dentech used to manufacture these parts would be idle. Should Dentech decide to purchase the parts from Scott, the unit cost of RM67 would increase (decrease) by what amount?
2. Assume Dentech is able to rent out all its idle capacity for $75,000 per month. If Dentech decides to purchase the 10 units from Scott Supply, Dentech's monthly cost for RM67 would increase (decrease) by what amount?
3. Assume that Dentech does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $156,000 per month. If Dentech's management elects to manufacture RM67 in order to maintain quality control, what is the net amount of Dentech's cost from using the space to manufacture part RM67?