Foulds Company makes 18,000 units per year of a part it uses in the products it

Question

Foulds Company makes 18,000 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 $43.10 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 $12,600 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.60 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.

How much of the unit product cost of $51.10 is relevant in the decision of whether to make or buy the part? (Round your answer to 2 decimal places.)

What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? (Input the amount as a positive value.)

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 18,000 units required each year? (Round your answer to 2 decimal places.)

Foulds Company makes 18,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Explanation / Answer

Answer a. Relevant Unit Product Cost in the decision Making Direct material                14.00 Direct Labor                21.60 Variable MOH                  3.80 Avoidable Fixed Costs ($11.70 - $5.60)                  6.10 Relevant Unit Product Cost                45.50 Answer b. Stement of Incremental Cost of Accepting the offer of Outside Supplier Incremental Revenue Saving of Relevant Product Cost in Manufacturing ($45.50 X 18000 Units)           819,000 Additional Contribution Margin on production of other Product              12,600 Incremental Cost Purchase of part from Outside Supplier (18000 Units X 43.10)         (775,800) Incremental Profit / (Loss)              55,800 Answer c. Calculation of Maximum Amount per Unit Willing to Pay to outside Supplier Relevant Product Cost in producing Product (18000 Units X $45.50)     819,000.00 Add: Additional Contribution on production of other product        12,600.00 Total Relevant Cost     831,600.00 Max. Amt. per Unit ($831600 / 18000 Units)                46.20

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