Question

Foto Company makes 6,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: $12.10 19.70 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $43.50 An outside supplier has offered to sell the company all of these parts it needs for $4120 a unit. If the company accepts this offer, 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 contribution margin on this other product would be $43.200 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $6.30 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier This fixed manufacturing overhead cost would be applied to the company's remaining products Required: a. How much of the unit product cost of $43.50 is relevant in the decision of whether to make or buy the part? (Round "Per Unit" to 2 decimal places.) b. What is the financial advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 6,000 units required each year? (Round "Per Unit" to 2 decimal places.) a Rolevant manufacturing cost

Answer 1

a.

Direct material	$12.10
Direct labor	19.70
Variable manufacturing overhead	1.90
Fixed manufacturing overhead-Avoidable ($9.80-6.30)	3.5
Total relevant cost per unit	$37.2

b.

	Make decision	Buy decision	Net effect
Direct material	$72,600		$72,600
Direct labor	118,200		118,200
Variable manufacturing overhead	11,400		11,400
Fixed manufacturing overhead-Avoidable	21,000		21,000
Purchase price		247,200	(247,200)
Additional revenue		(43,200)	43,200
Total	$223,200	$(204,000)	$19,200

Financial advantage of purchasing the part = $19,200

c.

Maximum amount willing to pay to outside supplier = (Financial advantage + Purchase price) / Number of units

Maximum amount willing to pay to outside supplier = $(19,200 + 247,200) / 6,000 = $44.4 per unit