Question

roblem 4 (10 points) harp Image Company makes a part used in the manufacture of video cameras. Management is considering whether to continue manufacturing the part.or to buy the part from an outside source a cost of $21.30 per part. Sharp Image needs 100,000 parts per year. The cost of manufacturing 100.000 parts is computed as follows: $ 765,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs 612,000 510,000 663,000 $2,550,000 Sharp Image would pay $.30 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 35% of fixed manufacturing overhead. Sharp Image's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $75,000 Prepare an analysis to show which alternative makes the best use of Sharp Image's factory space: a) Make the part b) buy the part and leave facilities idle buy the part and use facilities to make another product

Answer 1

Expected Net cost that Sharpe Image comapny will incur to acquire 100000 parts under three alternative plans
		Outsource
	Make	Facilities Idle	Make new product
	$	$	$
Variable costs
Direct materials	765000
Direct labor	612000
Variable overhead	510000
Transport cost		30000	30000
Purchase cost		2130000	2130000
fixed manufacturing overhead	663000	430950	430950
Expected profit contribution from other product			-75000
Total Expected Net cost	2550000	2590950	2515950
In all the three situations, if Sharpe image company purchase the part from outside and idle space is used to manufacture another product will give lowest cost of $ 2,515,950