XYZ Company makes 14,000 units per year of a part it uses in the products it man

Question

XYZ Company makes 14,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $12.60 20.20 2.40 10.30 $45.50 outside supplier has offered to sell the company all of these parts it needs for $41.70 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 $72,800 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.80 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. Required: 1. How much of the unit product cost is relevant in the decision of whether to make or buy the part? 2. Compute the total relevant cost to make the part and the total relevant cost to buy the part. Which option do you recommend? Support your answer with computations

Explanation / Answer

1) Calculate relevant unit product cost :

2) Calculate relevant cost :

Company should buy the product.

Make Buy Direct material 12.60 Direct labour 20.20 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 4.50 Purchase cost 41.70 Total 39.70 41.70

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