Question

Foto Company makes 14,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $13.60 21.20 3.40 11.30 $49.50 An outside supplier has offered to sell the company all of these parts it needs for $42.70 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 $32,200 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $6.00 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: a. How much of the unit product cost of $49.50 is relevant in the decision of whether to make or buy the part? (Round "Per Unit" to 2 decimal places.) b. What is the financial advantage (disadvantage) of purchasing the part rather than making it? c. 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 14,000 units required each year? (Round "Per Unit" to 2 decimal places.) a. Relevant manufacturing cost

Answer 1

a.
Unit product cost	49.50
(-) Unavoidable fixed manufacturing cost per unit	6.00
Relevant manufacturing cost	43.50	per unit

b.
	Make	Purchase
Relevant manufacturing cost ( 43.50 * 14000 )	609000
Cost of purchase ( 42.70 * 14000 )		597800
Less : Additional contribution margin earned using the facilities		32200
Total relevant cost	609000	565600

Total relevant cost of making	609000
Less : Total relevant cost of purchase	565600
Financial advantage	43400

c.
Maximum acceptable purchase price = ( Cost of purchase + Financial advantage ) / Number of units = ( 597800 + 43400 ) / 14000	45.80	per unit