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. His boss, Jeff, needs help. The companycurrently makes its own handlebar kits for all snowmobile models and personal watercraft models. Variablecosts to produce one batch of 120 units are as follows.Variable Costs to MakeDM$12,000DL16,000Variable-MOH3,000The company's fixed manufacturing costs related to the handlebar kits amount to $15,000. One-third ofthese costs are avoidable if it chooses to buy these components rather than make them in-house. Jeff is receivingsome pressure from company executives to find cost savings in operations and processes. The handlebar kit isthe starting point in his review of products and processes.Requireda. What 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, whatwould 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 anyother purpose. He finds that if the company can free up that space, it can be used to increase productionvolume 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 volumewould increase the company's operating income by $10,000. Does this situation change your answer toeither part (b) or part (c)? Explain.

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Answered: relevant costing

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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