Fouch Company makes 30,000 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 $15.70
Direct Labor $17.50
Variable Manufacturing Overhead $4.50
Fixed Manufacturing Overhead $14.60
Unit Product Cost $52.30
An outside supplier has offered to sell the company all of these parts it needs
for $51.90 a 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 on this other product would be
$219,000 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.
Required:
i. How much of the unit product cost of $52.30 is relevant in the decision of whether to make or buy the part?
i. How much of the unit product cost of $52.30 is relevant in the decision of whether to make or buy the part?
ii. What is the net
total dollar advantage (disadvantage) of purchasing the part rather than making
it?
iii. 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 supplying all 30,000 units required each
year?
