candice company makes 10,000 units per year of a part it uses in the products it
ID: 2447302 • Letter: C
Question
candice company makes 10,000 units per year of a part it uses in the products it manufactures. the unit product cost of this par is computed as follows:
Direct Materials $15.20
Direct Labor : 20.50
Variable manufacruing overhead :3
fixed manufacturing overhead : 10.9
Unit product cost : $49.60
an outside supplier has offered to sell the company all of these parts it needs for $4230 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 soother product would be $39000 per year.
If the part were purchased from the outside supplier, a lll of the direct labor costs of the part would be avoided, however, $5.50 of the fixed manufacturing costs being applied to the part would continue even if the part were purchased from an outside supplier. this fixed manufacturing overhead cost would be applied to the company's remaining products.
1. how much of the unit product cost of $4960. is relevant in the decision if whether to make or buy the part?
2. what it the net total dollar advantage (disadvantage) of purchasing the part rather making it?
3. 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 10,000 units required each year?
Explanation / Answer
1. CALCULATION OF RELEVANT COST
TOTAL UNIT PRODUCT COST =$49.60
LESS:UNAVOIDABLE FIXED MANUFACTURING COST =$5.50
RELEVANT COST =$44.1
HENCE RELEVANT UNIT PRODUCT COST IS $44.1.UNAVOIDABLE FIXED COST OF $5.5 IS NOT CONSIDERED AS IT WOULD BE INCURRED IRRESPECTIVE OF THE DECISION TO MAKE OR TO BUY THE PART
2.(ASSUMED THAT THE PURCHASE PRICE PER UNIT IS $42.30)
NET TOTAL DOLLAR ADVANTAGE OF PURCHASING THE PART=(PURCHASE COST-MANUFACTURING COST NET OF UNAVOIDABLE FIXED MANUFACTURING COST)*TOTAL UNITS
=($42.3-$44.1)10,000
= $(18,000)
HENCE PURCHASING IS ADVENTAGEOUS BY $18,000
3.MAXIMUM AMOUNT THE COMPANY SHOULD BE WILLING TO PAY PER UNIT=$44.1.
AS IN CASE PAYING MORE THAN $44.1 PER UNIT MANUFACTURING WOULD BE MORE ADVANTAGEOUS.
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