Question

Foto Company makes 50,000 units per year of a part it uses in the products
it manufactures. The cost per unit of this part is shown below:

direct materials .............. $13.00
direct labor ..................  10.10
variable overhead .............   6.50
allocated fixed overhead ......   8.60
total ......................... $38.20

An outside supplier has offered to sell Foto Company 50,000 of these parts
for $31.60 per unit. If the company accepts this offer, the facilities now
being used to make the part could be used to make more units of a product
that is in high demand. The additional contribution margin earned on this
other product would be $120,000 per year.

Calculate the increase in company profits if Foto Company accepts the
outside suppliers offer.

Answer 1

avialable cost are those which can be avoided if the company decides to buy from any outside supplier. It does not include fixed overhead as it will continue to incur whether the company decides to make the product within the company or buy the product from outside

Available cost
Direct materials ($13 per unit x 50000 units)	$   6,50,000.00
Direct labor ($10.10 per unit x 50000 units)	$   5,05,000.00
Variable overhead ($6.50 per unti x 50000 units)	$   3,25,000.00
Total avoidable costs	$ 14,80,000.00

Calculating outside purchase cost

Outside purchase cost = Purchase price per unit x No. of units

= 31.60 per unit x 50000 units

= 1580000

Calculating decrease in profit

Decrease in profit = Outside purchase cost - (Avoidable cost + Opportunity cost)

= 1580000 - (1480000 + 120000)

= 1580000 - 1600000

= - 20000