Kirkland Company Manufactures a Part for Use in Its Production

Essay

Kirkland Company manufactures a part for use in its production of hats.When 10 000 items are produced,the costs per unit are:
$$\begin{array} { l r } \text { Direct materials } & \$ 0.60 \\\text { Direct manufacturing labour } & 3.00 \\\text { Variable manufacturing overhead } & 1.20 \\\text { Fixed manufacturing overhead } & \underline { 1.60 } \\\quad \text { Total } & \underline{\$ 6.40} \\\end{array}$$
Mike Company has offered to sell to Kirkland Company 10 000 units of the part for $6.00 per unit.The plant facilities could be used to manufacture another item at a savings of $9000 if Kirkland accepts the offer.In addition,$1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
a.What is the relevant per unit cost for the original part?
b.Which alternative is best for Kirkland Company? By how much?
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