Question

Make or Buy Desert Industries manufactures 5,000 units of Part X300 each month for use in production. The facilities now being used to produce Part X300 have fixed monthly overhead costs of $75,000, and a theoretical capacity to produce 7,000 units per month. If Desert were to buy Part X300 from an outside supplier, the facilities would be idle and 80% of the fixed costs would continue to be incurred. There are no alternative uses for the production facilities. The variable production costs of Part X300 are $34 per unit. Fixed overhead is allocated based on planned production levels. If Desert Industries continues to use 5,000 units of Part X300 each month, it would realize a net benefit by purchasing Part X300 from an outside supplier only if the supplier's unit price is less than what amount?

Answer 1

Answer----------$37

The unit price for purchase from outside must be less than 37 in order to benefit from outsourcing.

Per Unit Cost of making
	Make
Variable manufacturing cost	$              34.00
Avoidable fixed overhead (($75,000 x 20%)/5000)	$                3.00
Total Cost	$              37.00

Only the avoidable fixed overhead will be considered for calculating the relevant cost of manufacturing.