( Fouch Company makes 30,000 units per year of a part it uses in the products it
ID: 2387577 • Letter: #
Question
( Fouch Company makes 30,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct material…………………………………..$15.70
direct labor…………………………………………17.50
variable manufacturing overhead……………… 4.50
Fixed manufacturing overhead…………………...14.50
Unit product cost……………………………… 52.30
An outside supplier has offered to sell the company all of these parts it needs for $51.90 a 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 on this other product would be $219,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $6.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
Required:
i. How much of the unit product cost of $52.30 is relevant in the decision of whether to make or buy the part?
ii. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
iii. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 30,000 units required each year?
Explanation / Answer
a) How much of the unit product cost of $52.30 is relevant in the decision of whether to make or buy the part?
If agreed to purchase products from outside , the relevent cost would be 6.20 of fixed manfcturing cost .
b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it
makae
Buy
Advantage/ dis advatange
Unit cost
Total
Unit cost
Total cost
Unit cost
Total cost
Direct materials
15.7
471000
15.7
471000
Direct labor
17.5
525000
17.5
525000
Variable manufacturing overhead
4.5
135000
4.5
135000
Fixed manufacturing overhead
14.6
438000
6.2
186000
8.4
252000
Purchase price
51.9
1557000
-51.9
-1557000
Unit product cost
-5.8
-174000
C) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 30,000 units required each year?
The maximum amount can be paid for the uut sider's product
The total product cost = $52.30
less: continue fixed manfacturing cost = $ 6.20
= $46.10
makae
Buy
Advantage/ dis advatange
Unit cost
Total
Unit cost
Total cost
Unit cost
Total cost
Direct materials
15.7
471000
15.7
471000
Direct labor
17.5
525000
17.5
525000
Variable manufacturing overhead
4.5
135000
4.5
135000
Fixed manufacturing overhead
14.6
438000
6.2
186000
8.4
252000
Purchase price
51.9
1557000
-51.9
-1557000
Unit product cost
-5.8
-174000
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