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?
(Points : 15)
TUTORIAL PREVIEW
i. How much of the unit product
cost of $52.30 is relevant in the decision of whether to make or buy the part?
Relevant cost per
unit:
|
Direct Materials
|
15.70
|
|
Direct Labor
|
17.50
|
