Apple Company makes 50,000 units per year of a part it uses in the products it m

Question

Apple Company makes 50,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials $12
Direct Labor $10.10
Variable manufacturing overhead $2
Fixed manufacturing overhead $14.10
Unit product cost $38.20

An outside supplier has offered to sell the company all of these parts it needs for $37.30 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $310,000 per year.

If the part were purchased from the outside supplier, all of the variable cost of the part would be avoided. However, $9.70 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

a) How much of the unit product cost of $38.20 is relevant in the decision of whether to make or buy the part?

b)What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 50,000 units required each year?

Please show all your work and give detailed answers.

Explanation / Answer

(a) Only the variable costs are relevant to the decision and they are Direct Materials $12.00 Direct Labor 10.10 Variable Overhead 2.00 Total relevant cost per unit $24.10 (b) Cost per unit of purchasing $37.50 Less: Relevant cost per unit to manufacture (24.10) Additonal cost per unit to purchase $13.40 Mulitply by number of units x 50,000 Total Additional Cost $670,000.00 Less Contribution Margin of Other Product (310,000.00) Net Total Dollar Disadvantage of Accepting $360,000.00 (c) Current offer price 37.50 Net Total Dollar Disadvantage of Accepting $(360,000.00) Divide by Number of Units 50,000.00 Disadvantage per unit at current offer (7.20) Maximum offer price $30.30

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