Ahsan Company makes 60,000 units per year of a part it uses in the products it m

Question

Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $ 45.70 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 $318,000 per year. If the part were purchased from the outside supplies, all of the direct labor cost of the part would be avoided. However, $3.50 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. What is the net total dollar advantage(disadvantage) of purchasing the part rather than making it?

Explanation / Answer

Particulars Make Purchase Increase Decrease Costs: Direct Materials 636000 0 -636000 Direct Labor 912000 0 -912000 Variable Manufacturing 126000 0 -126000 Fixed Manufacturing 756000 210000 -546000 Purchasing Cost 0 2742000 2742000 Total 2430000 2952000 522000 Additional Contribution 0 318000 318000 Net Benefit/(Loss) -204000

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