Question

The unit product cost of a part is as follows:

Direct materials	$	13.00
Direct labor		20.00
Variable manufacturing overhead		3.00
Fixed manufacturing overhead		10.00
Unit product cost	$	46.00

The company makes 8,000 units per year of the part.

The company has an offer to purchase all the parts it needs for $42.30 a unit. If the company accepts this offer, the space that is freed up can be used to produce another product. The new product would generate additional contribution margin of $46,400 per year.

If the company decides to buy the part, all of the direct labor cost of the part would be avoided. However, $5.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part was purchased. The company's remaining products would absorb the fixed overhead cost.

Required:

a. How much of the unit product cost of $46.00 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?

Answer 1

1) Out of $46 only $40.60 is relevant for Decision making

Particulars	Produce
Direct Material	13
Direct labour	20
Variable Manufacturing cost	3
Avoidable Fixed cost Manufacturing cost	4.60
Unit cost	40.60

2)

financial advantage of purchasing the part rather than making it ,is $32,800

Particulars	Produce
Direct Material	13
Direct labour	20
Variable Manufacturing cost	3
Avoidable Fixed cost Manufacturing cost	4.60
Unit cost	40.60
Units	8000
Total cost(A)	324800
Particulars	Buy
Purchase cost	338400
Less:Additional contribution	46400
Real Purchase cost(B)	292000
Benefit(A-B)	32800.00