Question

Foto Company makes 12.000 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 materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $12.80 20.4e 2.6e 10.se $46.30 An outside supplier has offered to sell the company all of these parts it needs for $41.90 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 $52,800 per year If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.60 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 $46 30 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 wiling to pay an outside supplier per unit for the part f the supplier commits to supplying all 12.000 units required each year? (Round "Per Unit" to 2 decimal places) a Relevant manulacturing cost per unit b c Maximum acceptable purchase price per unit

Answer 1

a.
Unit product cost	46.30
(-) Unavoidable fixed manufacturing cost per unit	5.60
Relevant manufacturing cost	40.70	per unit

b.
	Make	Purchase
Relevant manufacturing cost ( 40.7 * 12000 )	488400
Cost of purchase ( 41.90 * 12000 )		502800
Less : Additional contribution margin earned using the facilities		52800
Total relevant cost	488400	450000

Total relevant cost of making	488400
Less : Total relevant cost of purchase	450000
Financial advantage	38400

c.
Maximum acceptable purchase price = ( Relevant manufacturing cost + Additional contribution margin eanred using the facilities ) / Number of units = ( 488400 + 52800 ) / 12000	45.10	per unit