Transcribed Image Text: P5.2 (LO 1, 2, 3, 4), AP Justin studied relevant costing in his introductory and upper-level accounting courses, but never thought he would use those skills-let alone

Transcribed Image Text: P5.2 (LO 1, 2, 3, 4), AP Justin studied relevant costing in his introductory and upper-level accounting courses,
but never thought he would use those skills-let alone so soon! Yet here he is, in the second month of his sum-
mer internship at a snowmobile and personal watercraft manufacturer. s boss, Jeff, needs . The company
currently makes its own handlebar kits for all snowmobile models and personal watercraft models. Variable
costs to produce one batch of 120 units are as follows.
Variable Costs to Make
DM
$12,000
DL
16,000
Variable-MOH
3,000
The company’s fixed manufacturing costs related to the handlebar kits amount to $15,000. One-third of
these costs are avoidable if it chooses to buy these components rather than make them in-house. Jeff is receiving
some pressure from company executives to find cost savings in operations and processes. The handlebar kit is
the starting point in his review of products and processes.
Required
a. is the relevant cost to make one handlebar kit?
b. If a supplier approached Justin’s boss and offered to sell the company handlebar kits for $400 each, what
would Jeff’s response be? Why?
c. If a supplier offers to sell the company handlebar kits for $250 each, what would Jeff’s response be?
Describe what other factors would be relevant to this decision.
d. Jeff conducts additional research to determine if the handlebar manufacturing space could be used for any
other purpose. He finds that if the company can free up that space, it can be used to increase production
volume for snowmobiles and watercraft. Given that demand for these products has been strong, the com-
pany feels confident it could sell the higher volume of products with no difficulty. This additional volume
would increase the company’s operating income by $10,000. Does this situation change your answer to
either part (b) or part (c)? Explain.

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