Question

super Center produces a part (product A) that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 12,000 units, are as follows:

Direct materials	$35.00
Direct labour	$12.00
Variable manufacturing overhead	$7.00
Fixed manufacturing overhead	$6.00
Total cost	$60.00
The fixed overhead costs are unavoidable.

Assume Home Center can purchase 12,000 units of the part (product A ) from Tech Company for $56.00 each, and the facilities currently used to make the part could be used to manufacture 12,000 units of another (product B) that would have an $3 per unit contribution margin. If no additional fixed costs would be incurred, what should Home Center do?

Answer 1

Answer- The Home Center should purchase the units from Tech Company and current facilities should use to manufacture product B, total benefit will be =$12000.

Explanation- If the company has no alternative facilities that are now being used to produce the units, the financial disadvantages of buying 12000 units from outside supplier is

($56 per unit -$54 per unit)*12000 units =$24000

But product is purchase from outside supplier then Home Center can use freed capacity to manufacture product B then contribution margin of the product B would be $36000 (ie- 12000 units*$3 per unit).

Hence net benefit wiil be =Benefit from product B-Loss in purchase from supplier

=$36000-$24000

=$12000

Where- Relevant variable per unit = Direct materials + Direct labor+ Variable manufacturing overhead

= $35+$12+7

= $54 per unit