Thank you! Please show all work. Deer currently manufactures a subcomponent that
ID: 2455331 • Letter: T
Question
Thank you! Please show all work.
Deer currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $12. Deer currently produces 80,000 subcomponents at the following manufacturing costs: If Deer has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier? If Deer has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier? Now assume Deer could produce a new product earning a profit of $120,000 if the subcomponent were purchased from the supplier. Now what would be the profit impact of buying from the supplier?Explanation / Answer
a. Total Cost of Production in House = 13.50 x 80,000 = $1,080,000
If purchase from outsider: 12 x 80,000 = $960,000
Add: Fixed cost which will continue = 2.50 x 80,000 = 200,000
Total Cost of purchase from outsider = 1,160,000
Impact on Profit = 1,160,000 - 1,080,000 = 80,000
Profit will be reduced by $80,000
b. Maximum Price that can be paid: 13.50 - 2.50(Fixed Manufacturing O/H) = $11 Per Unit
c. Impact on profit:
Profit from new Product = 120,000
Less: Loss from Purchase = 80,000
Net impact on Profitability = $40,000
Profit will be increased by $40,000
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