Question

PEI Lighthouse Company makes 20,000 units per year of a specialty light used by lighthouses all around the world. The unit product cost of this part is computed as follows: Direct Materials 24.70 Direct Labour 16.30 Variable Manufacturing Overhead $2.30 Fixed Manufacturing Overhead 13.40 $56.70 Unit Product Cost An outside supplier has offered to sell the company the part that PEI Lighthouse Company needs for $51.80 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 $44,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is 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 1) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part? 2) what is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? 3) 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 20,000 units required each year?

Answer 1

Ans: a) Relevant cost per unit: Direct Materials S24.70 Direct Labour Variable Manufacturing Overhead S16.30 S 2.30 Fixed Manufacturing Overhead ($13.40 - S5.10) Relevant Manufacturing Cost S8.30 S51.60 b) Net advantage (disadvantage) Manufacturing Cost Savings (S51.60 x S 1,032.000 20,000) Additional Contribution Margin Cost of Purchasing the Part ($51.80 x 20,000)($1.036.000) S44.000 Net Advantage (Disadvantage) 40,00 c) Maximum acceptable purchase price Manufacturing Cost Savings Additional Contribution Margin $1,032.000 S44.000 Total Benefit Number of Units $1,076,000 Benefit per Unit 80 KINDLY RATE THE ANSWER AS THUMBS UP. THANKS A LOT