Bancroft currently manufactures a subcomponent that is used in its main product.

Question

Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $122. Bancroft currently produces 20,300 subcomponents at the following manufacturing costs:

a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?



b. If Bancroft has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier?



c. Now assume Bancroft would avoid $322,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

Per unit Direct materials $ 42 Direct labor 32 Variable manufacturing overhead 37 Fixed manufacturing overhead 18 Unit cost $ 129

Explanation / Answer

a Per unit Total Make Buy Make Buy Direct materials 42 852600 Direct labor 32 649600 Variable manufacturing overhead 37 751100 Purchase cost 122 2476600 Total 111 122 2253300 2476600 Profit decreases by $223300 (2476600-2253300) b Maximum price per unit = $111 c Profit increases by $98700 (322000-223300)

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