Question

JLM Company makes 12,000 units per year of a part it uses in the products it manufactures. The per unit product cost of th is part is shown below: .......... direct materials. direct labor variable overhead fixed overhead total. ..... $15.00 16.00 11.00 ????? $????? An outside supplier has offered to sell JLM Company 12,00 0 units of this part a year for $55.00 per unit. If JLM Company a ccepts this offer, the facilities now being used to make this pa rt could be used to make more units of a product that is in high d emand. The additional contribution margin that could be earned o

im confused on what is missing ?

Answer 1

	Make	Buy	Increase (Decrease) in Net Income
Direct materials (12000 x $15)	180000	0	180000
Direct labor (12000 x $16)	192000	0	192000
Variable overhead (12000 x $11)	132000	0	132000
Purchase price (12000 x $55)	0	660000	-660000
Opportunity cost	34800	0	34800
Fixed overhead (Balance amount)	252000	100800	151200
Total $	790800	760800	30000

The increase (decrease) in net income of $151200 by buying the part is the balance amount as the total increase in net income by buying the part is $30000.

This $151200 is the 60% of the fixed overhead cost that would be eliminated thus resulting in an increase in net income.

Thus, total fixed overhead = $151200/60% = $252000

Fixed overhead cost per unit = $252000/12000 = $21