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 20,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $36 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||20,000 Units
|Variable manufacturing overhead||4||80,000|
|Fixed manufacturing overhead, traceable||6||*||120,000|
|Fixed manufacturing overhead, allocated||9||180,000|
*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 $200,000 per year. Given this new assumption, how much would be the financial advantage of buying 20,000 electronic circuits from the outside supplier?
Cost of Purchase : 20,000 Units @$36 each
= 20,000 * $36 = $720,000
Cost savings if Purchased from outside :
Direct Material : 20,000 * $13 = $260,000
Direct Labor : 20,000 * $11 = $220,000
Variable Manufacturing Overhead : 20,000 * $4 = $80,000
Saving in supervisory salary : 20,000 *1/3 *$6 = $40,000
Additional Contribution margin of new product : $200,000
Total Savings : $260,000 + $220,000 + $80,000 + $40,000 + $200,000 = $800,000
So Net Savings will be = $800,000 - $720,000 = $80,000
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