Each year, Madsen Company purchases 8,000 units of a part that it needs for prod

Question

Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Madsen Company that a price increase will take effect shortly, which will bring the price of the part to $25 per part. Madsen Company is considering the use of idle facilities to produce the part. The annual production costs to produce the needed 8,000 parts are as follows:

Direct materials                                $17,500

Direct labor                                         30,000

Variable indirect production costs 14,000

Fixed indirect production costs      33,500

The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production costs are avoidable.

Determine if Madsen Company should buy the part or produce it internally.

Show your work

Pall 2012 I Anatysis FINAL EXAM 1. (20 pts) Every ycar, Mothet Cumpany purehieesa produce its produet. The sopplier notihed Moer t otmpary take effect shortly, which wit bring the price ofthsprst fli Whey fiodoo has an idle facility and considers uRing n fu prodi-the cost for the needed 8,000 units will be bring the price of tb part ss V25 tu produce the part. t Direct aaterials Direct labor Indirect production costs variable Indirect production costs-fixed 14.006 33.300 anmual rem of 999 The idle facility could also be rented out at an indirect production costs are avoidable a) List the alternatives that the company h b) which of the alternatives you listed in as. es you listed in a) is best and wuY 2. (10 pts) Riverside Industries tui information is availabl

Explanation / Answer

If Company Produce Direct material Cost              17,500 Direct Labor Cost              30,000 Indirect production Cost              14,000 Fixed Indirect Production Cost              33,500 Total Cost              95,000 Add: Annual Rent idle facility (oppo. Cost)              99,000 Total Cost            194,000 Cost of Bought out 8000*25            200,000 Then Saving if produce                6,000 Madsen Company should internally produce Idle facility rent added because if company not internally produce then it can be rented

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