QUESTION 1 Promco makes 60,000 pieces per year of a special fixtures to use in o

Question

QUESTION 1 Promco makes 60,000 pieces per year of a special fixtures to use in one of its m year at $1.55 each. iction costs are detailed below. An outside supplier has offered to supply The production costs per unit for manufacturing a fixtures are: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead* $0.65 0.45 0.40 0.50 $2.00 1- Should Promco make or buy the fixtures? 2- Suppose the potential supplier of the fixtures offers Promco a discount in the project if Promco purchases 60,000 fixtures annually. This discour $15,000 per year. Should Promco consider purchasing the fixtures?

Explanation / Answer

If the product is manufactured the relevant cost of production = variable cost = 0.65 + 0.45 +0.4 = 1.50

But buying the product will cost 1.55 per unit, which implies a loss of 0.05 per unit or 60000 units * 0.05 = 3000 per year.

1) So, promco should should continue to make the product.

In the second case, we see that there is a discount offer of 15000 per year. In such case, the gain due to discount covers the loss of buying of 3000 ( calculated in question - 1 above). Thus the net result is 12000 profit in buying the product.

2) yes the product can be purchased by promco

Note : In the question we observe a star mark on fixed cost. But no other information is provided. If you see any such information is missing, give that information in the comment box, I shall provide an EDITED solution again.

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