Question

28

Hill Fabricators manufactures a variety of parts that the company can use to produce metal stud fixtures. The M2 part is a popular universal part used in the production of several other parts at its manufacturing facility in Ohio. Al a recent meeting, the managerial accountant reported that 11% of its fixed overhead cots assigned to the M2 part will not continue if Hill Fabricators decides to outsource the production of the M2 part at $43 per unit to its competitor, Mason Manufacturing The managerial accountant at Hill Fabricators presented the following data that represents the cost to produce 1.200 units of the M2 part in-house: Hill Fabricators Monthly Analysis: Part M2 Direct materials $30,000 Direct labor $4,000 Variable overhead costs $19,000 Fixed overhead costs $16.000 What are the monthly avoidable costs if Hal Fabricators outsources the production of the M2 part to Mason Manufacturing? What is the change in operating income? What is the per unit cost to produce the M2 part? O A $65,840; $5,400 decrease; $45.63 O B. $53,360; 63,160 decrease; $45.63 OC. $51,600; 55,400 increase: $57.50 OD. $54,760; $3,160 increase; 557.50

Answer 1

Correct answer----------(D) $54,760: $3,160 increase : $57.50

Working

Differential Analysis
	Make	Buy
Direct material	$ 30,000
Direct labor	$ 4,000
Variable Overheads	$ 19,000
Avoidable Fixed overhead	$ 1,760*
Purchase price		$ 51,600
Total relevant Cost	$ 54,760	$ 51,600

*16000 x 11%

.

Total Cost of Buying	$ 51,600
Total Cost of manufacturing	$ 54,760
Cost saving if outsoursed	$ 3,160

.

Per Unit Cost
	Make
Direct material	$        25.00
Direct labor	$           3.33
Variable Overhead (170000/50000)	$        15.83
Avoidable fixed overhead	$        13.33
Outside purchase price
Total Cost	$        57.50