Leftington Company is currently manufacturing Part P123. It produces 48,100 unit

Question

Leftington Company is currently manufacturing Part P123. It produces 48,100 units of Part P123 per year. This part is used in the manufacturing of many products produced by Leftington. The breakdown of the cost per unit for P123 is shown below. The fixed overhead cost (at $5.00/unit above) would still remain with the company even if Leftington stops manufacturing Part P123. An outside supplier has offered to sell the same part to Leftington for $10.00. Currently, there is no alternative use for the capital assets used to produce Part P123. These capital assets will not be sold if the company chooses to buy Part P123. Should Leftington Company make or buy Part P123? What is the maximum price Leftington should be willing to pay an outside supplier for the part? If Leftington buys the part for $12 instead of making it, by how much will operating income increase or decrease?

Explanation / Answer

A) Leftington should buy product because cost to make i.e,$ 10.5 is more than the buy price

B)Maximum price could be paid to outsider is $ 10.5 since cost to make that product is $10.5

C)If Leftington buys product at $12 , operating income will be decreased by $ 72,150 (12-10.5)

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