Wildcat Company currently buys 50,000 units of a part used to manufacture its pr

Question

Wildcat Company currently buys 50,000 units of a part used to manufacture its product at S100 per unit. Recently the supplier informed Wildcat Company that a 20 percent increase will take effect next year. Wildcat has some additional . space and could produce the units for the following per-unit costs (based on 50,000 units): $36 34 Direct materials Direct labor Variable overhead Fixed overhead 26 $126 Total If the units are purchased from the supplier, Wildcat would continue to incur $250,000 of fixed costs. Required a. Should Wildcat Company buy the parts externally or make them internally? Prepare differential analysis to support your decision Should Wildcat Company buy the parts externally or make them internally, assuming that they can rent the plant to support your decision. b. 0 per year to XYZ Corporation when the parts are purchased externally? Prepare differential analysis

Explanation / Answer

For 50000 Units Per Unit Total Make Buy Make Buy Variable Costs:- Cost to buy from outside (100+20%) 120 6000000 Direct Material 36 1800000 Direct Labor 34 1700000 Manufacturing Overhead 30 1500000 Fixed Overhead 26 5 1300000 250000 Total Relevant Cost 126 125 6300000 6250000 Difference in favor of Buying 1 50000 Answer to (a) Company should buy parts externally Answer to (b) Total Relevant Cost 126 125 6300000 6250000 Less: Rent receipts from plant 325000 Net Relevant Cost 126 125 6300000 5925000 Difference in favor of Buying 375000 Company should buy parts externally

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