Bernard Company manufactures 20,000 units of part A8 each year for use on its pr

Question

Bernard Company manufactures 20,000 units of part A8 each year for use on its production line. The cost per unit of A8 is as follows:

Direct materials................................................................................................ $2.40

Direct manufacturing labor................................................................................ 3.50

Variable manufacturing overhead...................................................................... 1.60

Fixed manufacturing overhead........................................................................... 5.00

            Total cost per part............................................................................... $12.50

An outside supplier has offered to sell 20,000 units of part A8 each year to Bernard Company for $14.25 per part. If Bernard Company accepts this offer, the facilities now being used to manufacture part A8 could be rented to another company at an annual rental of $75,000. However, Bernard Company has determined that $3.00 of fixed manufacturing overhead allocated to part A8 would continue even if part A8 were purchased from an outside supplier. Bernard’s direct manufacturing labor consists of temporary help. Thus, Bernard can hire and dismiss those workers at will.

Required:

1.   Should Bernard Company accept the outside company’s offer? Why or why not? Show supporting computations.

2.   List two qualitative factors that Bernard should consider when determining whether to accept the offer.

Explanation / Answer

Make Buy Cost of purchasing 285000 (20000*14.25) Cost of making: Direct materials 48000 (2.4*20000) Direct labor 70000 (3.5*20000) Variable manufacturing overhead 32000 (1.6*20000) Fixed manufacturing overhead 40000 (2*20000) Opportunity cost (Rental value) 75000 Total Cost 265000 285000 20000 (285000-265000) 1 Bernard Company should not accept the outside company's offer as the relevant cost of making is less than relevant cost of buying by $20,000 as shown above. 2 The two qualitative factor before accepting the offer are: a. Quality of part offered by the supplier. b. Certainty of availaibility of part whenever required.

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