Digital Devices manufactures cell phones that sell for $125 each. The company wa

Question

Digital Devices manufactures cell phones that sell for $125 each. The company wants to reduce manufacturing costs and one option is to buy a part needed to manufacture the cell phones from a supplier in Boise, Idaho for $8.00 per part. Digital Devices needs 100,000 parts per year for all of its models. The costs of producing the part internally is provided below:

Per Unit Total (100,000 Units)

Raw Materials $.35 $35,000

Direct Labor $3.25 $325,000

Variable Mfg Overhead $.65 $65,000

Fixed Manufacturing OH $200,000

If the part is purchased from the supplier 40 percent of the fixed manufacturing overhead costs will be eliminated and factory space can be rented out for $80,000 per year. Determine if the company should make or buy the part and answer questions 16 through 19.

16. What are the relevant costs to make the parts internally: a. $524,000 b. $568,000 c. $625,000 d. None of the above

17. What are the relevant costs to buy the parts: a. $840,000 b. $919,000 c. $721,000 d. None of the above

18. What does it cost per part to buy the parts from the supplier: a. $4.65 b. $6.45 c. $7.25 d. None of the above

19. How much cheaper is it to make the 100,000 parts than to buy them: a. $285,000 b. $215,000 c. $185,000 d. $160,000

Explanation / Answer

Relevant cost to make internally

1-

raw material

35000

direct labor

325000

variable manufacturing overhead

65000

Fixed overhead

200000

relevant cost to make

625000

2-

relevant cost to buy

purchase cost

100000*8

800000

unavoidable fixed manufacturing overhead =200000*60%

200000*60%

120000

less rent from factory space

-80000

relevant cost to buy

840000

3-

cost per part to buy the parts from the supplier

840000/100000

8.4

4-

How much cheaper is it to make the 100,000 parts than to buy them

840000-625000

215000

Relevant cost to make internally

1-

raw material

35000

direct labor

325000

variable manufacturing overhead

65000

Fixed overhead

200000

relevant cost to make

625000

2-

relevant cost to buy

purchase cost

100000*8

800000

unavoidable fixed manufacturing overhead =200000*60%

200000*60%

120000

less rent from factory space

-80000

relevant cost to buy

840000

3-

cost per part to buy the parts from the supplier

840000/100000

8.4

4-

How much cheaper is it to make the 100,000 parts than to buy them

840000-625000

215000

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