Of the total fixed overhead assigned to Q108, $77,000 is direct fixed overhead (

Question

Of the total fixed overhead assigned to Q108, $77,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor - neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $11. There is no alternative use for the facilities currently used to produce the part.

Conceptual Connection: Should Blasingham make or buy Part Q108?

SelectbuymakeItem 1

What is the most that Blasingham would be willing to pay an outside supplier?

$   per unit

If Blasingham buys the part, by how much will income increase or decrease? Enter an increase as a positive amount, and a decrease as a negative amount.

$  

Explanation / Answer

Hi,

Please find the answer as follows:

Make:

Direct Materials = 35000 * 6 = 210000

Direct Labor = 35000*2 = 70000

Variable Overhead = 35000*1.5 = 52500

Fixed Overhead = 77000

Total Relevant Costs = 409500

Buy

Purchase Cost = 35000*11 = 385000

Blasingham should purchase the part.

Part B:

Maximum Price = 409500/35000 = 11.70

Part C:

Income would increase by = 409500 - 385000 = 24500

Thanks.

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