Foto Company makes 10,000 units per year of a part it uses in the products it ma

Question

Foto Company makes 10,000 units per year of a part it uses in the products it manufactures. The cost per unit of this part is shown below:

direct materials .............. $13.20

direct labor .................. 20.80

variable overhead ............. 3.00

allocated fixed overhead ...... 10.90

total ......................... $47.90

An outside supplier has offered to sell Foto Company these parts in need for $42.30 per 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 earned on this other product would be $39,000 per year. Calculate the decrease in company profits if Foto Company accepts the outside suppliers offer. If the part were purchased from the outside user, all of the direct labor cost of the part would be avoided. However, $6.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part was purchased from the outside supplier. The fixed manufacturing ovehead would be applied to the companys remaining products. a. How much of the unit cost of $47.90 is relvent in the decsion of weather to make or buy the product? b. What is the financial advantage (disadvantage) of purchsing the part rather than making it? c. 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 suplling all 10,000 units required each year?

Explanation / Answer

(a).

Working:

b.  

Working:

c.

Maximum price that should be offered = $41.70

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