Question

Deer currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $12. Deer currently produces 80,000 subcomponents at the following manufacturing costs:

	Per unit
Direct materials		$	4.50
Direct labor			3.00
Variable manufacturing overhead			3.50
Fixed manufacturing overhead			2.50
Unit cost		$	13.50

a. If Deer has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?

b. If Deer has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier?

c. Now assume Deer would avoid $120,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

Answer 1

a
	Per unit		Total 80000 units
	Make	Buy	Make	Buy
Direct materials	4.50		360000
Direct labor	3.00		240000
Variable manufacturing overhead	3.50		280000
Purchase cost		12		960000
Total	11.00	12.00	880000	960000
Profit would decrease by	80000	=960000-880000
b
Maximum per per unit = $11
c
	Make	Buy
Total cost	880000	960000
Opportunity cost	120000
Total relevant cost	1000000	960000
Profit would increase by	40000	=1000000-960000