Question

Situation One Rutro Corp. makes 59,000 units per year of a part it uses in the products it manufactures- The unit product cost of this part is computed as follows: Direct material $21.00 Direct labor 23.00 8.00 Variable manufacturing overhead Fixed manufacturing overhead Unit product cost 30.00 $82.00 An outside supplier has offered to sell the company all of the 59,000 parts it needs for $75.00 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 another product that is in high demand. The additional contribution margin on this other product would be $310,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, 64% 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.

Answer 1

Answer: 1) Relevant Cost per unit =Avoidable Cost = $ 21+$23+$8+$30*36% = $ 62.8 per unit 2) Advntage of Purchasing = ( Relevant Cost of making - cost of buying) * number of units+ Additional Contribution earned = ($62.8 - 75 ) *59000+310000 = $ 409800 (Disadvantage) 3) Company Should Continue to manufacture because company had Disadvantge if Product is Purchased. 4) Only aviodable Fixed costs ids relevant for the purpose of Decision making as Unavoiadable costs are incurred in both the cases. 5) Fixed Cost will become avoidable on buying. 6) Maximum amount = avoiadable costs + Contribution margin earned per profit = $ 62.8+(310000 )/59000 = $ 68.05 per unit