Question

Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 13,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $30 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic circuits internally: Per Unit 13,000 Units per Year Direct materials $ 13 $ 169,000 Direct labor 9 117,000 Variable manufacturing overhead 3 39,000 Fixed manufacturing overhead, traceable 3 * 39,000 Fixed manufacturing overhead, allocated 6 78,000 Total cost $ 34 $ 442,000 *One-third supervisory salary; two-thirds depreciation of special equipment (no resale value). Suppose that if the electronic circuits were purchased, the division supervisor position could be eliminated. Fixed manufacturing overhead will be allocated to other products made by the company. Also, the company could use the freed production capacity to launch a new product. The segment margin of the new product would be $130,000 per year. Given this new assumption, how much would be the financial advantage of buying 13,000 electronic circuits from the outside supplier?

Answer 1

	Make	Buy	Financial Advantage (Disadvantage)
Purchase price (13000 x $30)	0	390000	-390000
Direct materials	169000	0	169000
Direct labor	117000	0	117000
Variable manufacturing overhead	39000	0	39000
Fixed manufacturing overhead, traceable	39000	26000	13000
Fixed manufacturing overhead, allocated	78000	78000	0
Opportunity cost	130000	0	130000
Total $	572000	494000	78000

The financial advantage of buying 13,000 electronic circuits from the outside supplier is $78,000.