(TCO H) A company makes 10,000 units per year of a part for use in one of its co

Question

(TCO H) A company makes 10,000 units per year of a part for use in one of its concerning the unit production costs of the Direct materials Direct labor Variable manufacturing OH Fixed manufacturing OH Total $250 125 50 150 $575 An outside supplier has offered to sell the company all of the parts it requires. If the company decided to discontinue making the parts, 20% of the above fixed manufacturing overhead costs could be avoided. Required: Assume the company has no alternative use for the facilities presently devoted to production of the parts. If the outside supplier offers to sell the parts for $425 each, should the company accept the offer? Fully support your answer with appropriate calculations.

Explanation / Answer

Differential analysis :

Company should buy the parts.because buying cost is less than manufacturing cost by $300000

Make Buy Direct material 2500000 Direct labour 1250000 Variable overhead 500000 Fixed overhead (150*20%) 300000 Purchase cost 4250000 Total relevant cost 4550000 4250000

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