4. (15 pts) Rayon Corp. estimates it will produce 40,000 units of a part that go

Question

4. (15 pts) Rayon Corp. estimates it will produce 40,000 units of a part that goes into its final product. It currently produces this part internally, but is considering outsourcing this activity. Current internal capacity permits for a maximum of 80,000 units of the part. The production manager has prepared the following information concerning the internal manufacture of 80,000 units of the part: Per unit Direct materials $4.00 Direct labor Variable overhead8 Fixed overhead 5 Total cost $23.00 The fixed overhead of S Sper unit includes a S 1.40 per unit allocation for salary paid to a supervisor to oversee production of the part. The fixed costs would not be reduced byout sourcing, except the supervisor would be terminated. Assume that if Rayon outsources, its purchase price from the outsourcer is $18 per unit. A) Should Rayon outsource? B) Assume Rayon has received a special order for 26,000 units of the part from Raymax, Co. will pay Rayon $27 per part, but will take the parts only if they have been manufactured by Rayon. Thus, Raymax will engage in the special order only if Rayon does not outsource any of its production. Should Rayon accept the special order?

Explanation / Answer

Calculation on Cost per Unit Direct Material $               4.00 Direct Labour $               6.00 Varable Overhead $               8.00 Variable Cost $             18.00 Fixed Cost Avoidable $               1.40 Total Cost Saved $             19.40 Outsourcing Cost $             18.00 Incremental Benefit $               1.40 Answer to Part a Since outsourcing gives incremental benefit of $ 1.40, Ryan Corp should outsouce production Answer to Part b Total cost saved in outsourcing of 40000 units $     56,000.00 Incremental benefit from special order $ 1,04,000.00 Since incremental benefit exceeds total cost saved Rayon should except the order.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.