Question

1110110uui DOULW115 101 PO01 PIUIII. EXERCISE 12–12 Make or Buy a Component [LO3] Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is: Direct materials ......... Direct labor ...................... Variable manufacturing overhead........ Fixed manufacturing overhead ......... Total cost per part ..... $ 4.80 7.00 3.20 10.00 $25.00 An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier. Required: Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted.

Answer 1

Incremental Make Buy Cost (Savings) Direct Materials (20000x$4.80) $ 96,000.00 $ 96,000.00 Direct Labor (20000x$7.00) $ 140,000.00 $ - $ 140,000.00 Variable Manufacturing Overhead (20000x$3.20) $ 64,000.00 $ - $ 64,000.00 Fixed Manufacturing Overhead (20000x$10;$6) $ 200,000.00 $ 120,000.00 $ 80,000.00 Opportunity Cost of renting Manufacturing Facilities $ 150,000.00 $ 150,000.00 Cost of Component from Outside Supplier |(20000x$23.50) $ 470,000.00 $(470,000.00) - $ Total Costs $ 650,000.00 $ 590,000.00 $ 60,000.00 Ś Operating Profit Will Increased by $60,000 if supplier's offer is accepted.