Question

What in Articulation, Inc. produces music stands. In its current manufacturing environment, Articulation makes all of the bases used in production. When 100,000 bases are produced, the total direct product costs equal $80,000, and manufacturing overhead can be expressed as y = $2x + $70,000.

A potential outside supplier has been identified. If the bases are purchased from the outsider supplier, $15,000 of annual fixed manufacturing overhead costs will be avoided and the freed-up capacity could be used to expand production, resulting in a $45,000 increase in Articulation’s total contribution margin.

Answer the following questions:

1. Assume Articulation will need 125,000 bases in the next period. At what purchase price would Articulation be economically indifferent between making the bases and purchasing the bases from the outside supplier? Show your calculations.

2. Why would the amount calculated be important for a manager to know?

Answer 1