Question

1. HAV, Inc. manufactures digital cameras. Hawkins is considering whether it should outsource production of a part used in the manufacturing of its cameras. A supplier has been identified who can sell the part to HAV at a price of $6.90 per unit.

Currently, 60,000 units of the part were made last year. At this production level, the company incurred $354,000 of total variable direct product costs. Manufacturing overhead increased by $0.10 for each unit produced. Fixed manufacturing overhead costs equaled $50,000.

If the part were purchased from the outside supplier, 75% of the total fixed manufacturing overhead cost would continue, and the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional income from this other product would be $22,000 per year.

Assuming the company will need 50,000 units of the part next year, at what purchase price per unit will HAV be economically indifferent between making and buying the part from the outside supplier? (circle your final answer)

Answer 1

To calculate the economically indifferent price, we must analyse the incremental cost savings of not producing the part.

		Per unit (50000 units)	Total Cost
Incremental Cost Savings	Direct product Cost	5.9	295000
Incremental Cost Savings	Variable Manufacturing overhead	0.1	5000
Incremental Cost Savings	Fixed manufacturing cost (25%)		12500
Opportunity cost	Income from other product		22000
Total Savings			334500
Total Savings per unit			6.69

the saving per unit by not producing is $ 6.69 which denotes that the company would be indifferent at this price.