Question

The Camel Company produces 12,800 units of item Roto 454 annually at a total cost of $243,200.

Direct materials	$	25,600
Direct labor		70,400
Variable overhead		57,600
Fixed overhead		89,600
Total	$	243,200

The Yukon Company has offered to supply 12,800 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $37,120 per year. At what price would Camel be indifferent to Yukon's offer?

Answer 1

Camel would be indifferent at a price of $18.90

Working

	Per Unit (cost /12800 units)	Total
Direct material	$                      2.00	$ 25,600
Direct labor	$                      5.50	$ 70,400
Variable manufacturing overheads	$                      4.50	$ 57,600
Avoidable fixed cost	$                      4.00	$ 51,200
Additional saving due to acceptance of offer	$                      2.90	$ 37,120
Total cost of making the product	$                    18.90	$ 241,920

The total cost of making also includes the saving in cost due to acceptance of offer that is of $37120. Fixed cost will be only 51200 since other fixed cost will still be paid no matter what decision is taken.

Alternative presentation

Differential Analysis
	Make	Buy
Direct material	$       25,600.00
Direct labor	$       70,400.00
Variable Overheads	$       57,600.00
Avoidable Fixed overhead	$       51,200.00
Purchase price		$       241,920.00
Additional benefit from Buying from outside		-$ 37,120
Total relevant Cost	$ 204,800	$ 204,800

Total cost /units =acceptable price

204800/12800=$18.90