The Flint Company manufactures 1,238 units of a part that could be purchased fro

Question

The Flint Company manufactures 1,238 units of a part that could be purchased from an outside supplier for $14 each. Flint’s costs to manufacture each part are as follows:

All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses.

Calculate net cost to buy if Flint leases the manufacturing facilities to another company for $7,032 per year.

Direct materials $2 Direct labor 4 Variable manufacturing overhead 4 Fixed manufacturing overhead 9   Total $19

Explanation / Answer

Hence there is a net benefit of $2,080 on buying the product from outside market

Note: Fixed overheads have not been considered in the above solution sincre the entire fixed overheads are unavoidable as given in the question

Particulars in $ Variable cost to manufacture one unit (a) 10 cost to purchase one unit from outside (b) 14 Extra cost in purchasing one unit from outside (b-a) 4 Total extra cost in producing 1,238 units (1,238*4) (c) 4,952 Less: Benefits from leasing the manufacturing facility (d) 7,032 Net benefit (c-d) (4,952-7,032) -2,080

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