Foulds Company makes 12,000 units per year of a part it uses in the products it

Question

Foulds Company makes 12,000 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 overheac 13.40 21.00 3.20 11.10 Unit product cost $ 48.70 An outside supplier has offered to sell the company all of these parts it needs for $42.50 a unit. 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 $37,200 per year If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided However, $6.20 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.

Explanation / Answer

a) Relevant costs; $ Direct material 13.4 Direct labor 21 Variable manufacturing overhead 3.2 Avoidable Fixed manufacturing overhead (11.1-6.2) 4.9 Total 42.5 b) Total costs if purchases from outside = 12000*42.5 = $510000 Additional contribution margin if purchases from outside = $37200 Net toal costs if purchases from outside = 12000*42.5 = $510000-$37200 = $472800 Total relevant costs if manufacture = 12000*42.5 = $510000 Net advantage if purchases from outside = $510000 - $472800 = $37200 c) Maximum amount per unit = ($510000+$37200)/12000 = $45.6 per unit

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