Kramer Company makes 4,600 units per year of a part called an axial tap for use
ID: 2530345 • Letter: K
Question
Kramer Company makes 4,600 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:
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.
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 $89 each, calculate the total cost for making the axial taps.
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 $92,000 annually. What is the maximum price Kramer Company should be willing to pay the outside supplier for axial taps?
Kramer Company makes 4,600 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:
Explanation / Answer
Solution:-
(a1)
Variable Cost of manufacturing 1 axial tap :-
Direct materials
41
Direct labor
16
Variable manufacturing overhead
14
Fixed manufacturing overhead (20*40%)
8
Total variable cost
79
Purchase Price from Outside supplier = 89
(a2) The company should not accept the offer due to following:-
Benefit in manufacture over purchase = 89-79 = 10
(b) Maximum price Kramer Company should be willing to pay the outside supplier for axial taps:-
Manufacturing variable cost of 4600 units (4600*79) = 363400
Opportunity cost of another product (additional contribution) = 92000
Maximum price to outsider = (363400+92000)/4600 = 99
Direct materials
41
Direct labor
16
Variable manufacturing overhead
14
Fixed manufacturing overhead (20*40%)
8
Total variable cost
79
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