For many years, Diehl Company has produced a small electrical part that it uses
ID: 2350948 • Letter: F
Question
For many years, Diehl Company has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The company's unit product cost for the part, based on a production level of 65,000 parts per year, is as follows:Per Part Total
Direct Materials $ 5
Direct labor 3.20
Variable manufacturing overhead 0.40
Fixed manufacturing overhead, traceable 2.70 $175,500
Fixed manufacturing overhead, common
(allocated on the basis of labor-hours) 2.15 $139,750
Unit product cost $13.45
An outside supplier has offered to supply the electrical parts to the Diehl Company for only $10.95 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds of the traceable fixed manufacturing costs consist of depreciation of special equipment that has no resale value. Economic depreciation on this equipment is due to obsolescence rather than wear and tear. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.
1) Determine the total relevant cost if parts are made inside the company
Total relevant cost (65,000 parts) = $________
2) Determine the total relevant cost if parts are purchased from the outside supplier.
Total relevant cost (65,000 parts) =$_______
3) What is the increase or decrease in profits as a result of purchasing the parts from the outside supplier rather than making them inside the company?
Profit would increase/decrease by $_____ per year
Explanation / Answer
1) Determine the total relevant cost if parts are made inside the company Direct Materials $ 5 Direct labor 3.20 Variable manufacturing overhead 0.40 Fixed manufacturing overhead, traceable (Sup Salary) = 2.70*(1/3) = 0.90 Remaining Tracable cost is Dep of Spl eqpt which will happen even if part is not made & hence not relevant. Fixed manufacturing overhead, common are period costs & will be incurred even if part is not made & hence not relevant. So Relevant cost pu = $5+$3.20+$0.40+$0.90 = $9.50 So Total Releavnt cost = $9.50 *65000 = $617,500 .............Ans (1) 2) Determine the total relevant cost if parts are purchased from the outside supplier. Direct Materials $ 5 Direct labor 3.20 Variable manufacturing overhead 0.40 Fixed manufacturing overhead, traceable (Less Sup Salary) = 2.70*(2/3) = 1.80 Remaining Tracable cost is Dep of Spl eqpt which will happen even if part is not made & hence relevant. Sup Salery is not relevant as he neednot be hired Fixed manufacturing overhead, common are period costs & will be incurred even if part is not made & hence this will be a Loss & hence relevant. = $2.15 So Relevant cost pu = $5+$3.20+$0.40+$1.80+$2.15 = $12.55 So Total Releavnt cost = $12.55 *65000 = $815,750 3) What is the increase or decrease in profits as a result of purchasing the parts from the outside supplier rather than making them inside the company? Profit would decrease by $815,750 - $617,500 = $198,250 per year
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