Taylor manufactures 12,000 units of a part used in its production to manufacture

Question

Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows:

Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000

Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the part would be totally eliminated.


17. What should Taylor's decision be, and what is the total cost savings that would result?
A) Make, $60,000
B) Buy, $60,000
C) Make, $78,000
D) Buy, $78,000

Explanation / Answer

Option A)Make , $60,000 Manufacturing cost for 12,000 units Manufacturing cost for 12,000 units Direct materials                        $24,000 Direct labor                                   60,000 Variable overhead                         54,000 Fixed cost                                     84,000                                                 _____________ Total cost                                  $222,000                                                ______________ Per unit cost of productions        $222,000/12.,000 = $18.5 The same unit will available in the market for $22. If it buys , then the total cost (12,000 * $22)               $264,000 Add: Rental revenue   (opportunity cost)                       $ 18,000                                                                               _______________ Total amount to buy 12,000 units                                 $282,000                                                                               _______________ Making cost               $222,000 Buying Cost                 282,000 Hence, the total cost savings that would result make($282,000-222,000) $60,000 Direct labor                                   60,000 Variable overhead                         54,000 Fixed cost                                     84,000                                                 _____________ Total cost                                  $222,000                                                ______________ Per unit cost of productions        $222,000/12.,000 = $18.5 The same unit will available in the market for $22. If it buys , then the total cost (12,000 * $22)               $264,000 Add: Rental revenue   (opportunity cost)                       $ 18,000                                                                               _______________ Total amount to buy 12,000 units                                 $282,000                                                                               _______________ Making cost               $222,000 Buying Cost                 282,000 Hence, the total cost savings that would result make($282,000-222,000) $60,000

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