For many years, Diehi Company has produced a small electrical part that it uses

Question

For many years, Diehi 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 60,000 parts per year, is as follows: An outside supplier has offered to supply the electrical parts to the Diehi Company for only $11.35 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds of the traceable fixed manufacturing costs consist of depreciation of special equipment that has no resale value. Economic depreciation on this equipment is due to obsolescence rather than wear and tear. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle. Required: Determine the total relevant cost if parts are made inside the company. (Do not round intermediate calculation. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Total relevant cost (60,000 parts) $ Determine the total relevant cost if parts are purchased from the outside supplier. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Total relevant cost (60,000 parts) $ What is the increase or decrease in profits as a results of purchasing the parts from the outside supplier rather than making them inside the company? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Explanation / Answer

Ans 1 Total relevent Cost Direct material $6 Direct labour 2.2 Variable manufacturing Overhead 0.5 Fixed Cost( 3.3*1/3) 1.1 Total relevant cost per unit $10 For 60000 units $588,000 Ans 2 Relevnat cost if purchased from outside supplier $11.35 For 60000 Units $681,000.00 Ans # Decrease in profit 681000-588000 $93,000.00 Note: Depreciation is a non cash expense so irrelevant cost

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