Question

Bancroft currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $122. Bancroft currently produces 20,600 subcomponents at the following manufacturing costs: Per unit Direct materials $ 45 Direct labor 31 Variable manufacturing overhead 40 Fixed manufacturing overhead 21 Unit cost $ 137 a. If Bancroft has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? b. If Bancroft has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? c. Now assume Bancroft would avoid $325,000 in equipment leases and salaries if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?

Answer 1

a
	Per unit		Total
	Make	Buy	Make	Buy
Direct materials	45		927000
Direct labor	31		638600
Variable manufacturing overhead	40		824000
Purchase cost		122		2513200
Total	116	122	2389600	2513200
Decrease in Profits = 251300-2389600 = ($123600)
b
Maximum price per unit $116
c
	Make	Buy
Total cost	2389600	2513200
Avoidable cost	325000
Total relevant cost	2714600	2513200
Increase in Profits = 2714600-2513200 = $201400