Question 2 Ahrends Corporation makes 70,000 units per year of a part it uses in

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Question 2

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

What is the financial advantage (disadvantage) of purchasing the part rather than making it?

$273,000

($126,000)

$147,000

$448,000

Direct materials $ 17.80 Direct labor 19.00 Variable manufacturing overhead 1.00 Fixed manufacturing overhead 17.10 Unit product cost $ 54.90

Explanation / Answer

Differential analysis :

financial advantage (disadvantage) of purchasing the part rather than making it

Advantage = (3542000-3395000) = 147000

so answer is c) $147000

Make Buy Direct material 1246000 Direct labour 1330000 Variable manufacturing overhead 70000 Fixed manufacturing overhead 623000 Purchase cost 3395000 Opportunity cost 273000 Total cost 3542000 3395000

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