Kramer Company makes 4,500 units per year of a part called an axial tap for use

Question

Kramer Company makes 4,500 units per year of a part called an axial tap for use in one of its products Data concerning the unit production costs of the axial tap follow: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $ 40 15 13 20 Total manufacturing cost per unit 88 An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If Kramer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided, Assume that direct labor is a variable cost Required a1. Assume Kramer Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $85 each, calculate the total cost for making the axial taps. Total cost a2. Should Kramer Company accept the offer? es No b. Assume that Kramer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $90,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps? Maximum acceptable price

Explanation / Answer

workings Make or buy -Kramer company Make (4,500 units) Buy (4,500 units) Per unit Total Per unit Total Variable cost: $             85.00 $                         3,82,500 Direct Material $                  40.00 $                     1,80,000 Direct Labor $                  15.00 $                         67,500 Variable manufacturing over head $                  13.00 $                         58,500 Total variable production cost $                  68.00 $                     3,06,000 $             85.00 $                         3,82,500 Total Fixed overheads $                  20.00 $                         90,000 $                            45,000 Total costs $                     3,96,000 $                         4,27,500 Profit Increases by $           31,500 a.1 The total cost of making axial taps $            3,96,000 a.2 Kramer company should accept the offer as the profit increases by $ 31,500 a.3 If the existing facilities used for expanding another product yields increased contribution of $ 90,000, it covers the entire fixed costs. In that case the maximum price Kramer company should be willing to pay will be equal to the variable costs of making the product.i.e $ 68 per each axial tape.

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