Kirkland Company manufactures a part for employ in its production of hats. When 10,000 items are produced, the costs for each unit are:
Direct materials$0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total$6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of part for $6.00 per unit. The plant facilities could be employed to manufacture another item at the savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead upon the original item would be eliminated.
a. Determine the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?