Ahsan Company makes 60,000 units per year of a part it uses in the products it m

Question

Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

16.20    

$53.10    

  
An outside supplier has offered to sell the company all of these parts it needs for $81.70 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 $320,400 per year.   
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $4.70 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.

  Direct materials $13.60       Direct labor 18.20       Variable manufacturing overhead 5.10       Fixed manufacturing overhead

16.20    

  Unit product cost

$53.10    

Explanation / Answer

ans: (1,857,600)

Direct materials.... .... .... .... .... ....$13.60
Direct labor... .... .... ... .... ..... .... ..18.20
Variable manufacturing overhead ....2.10
Fixed manufacturing overhead... .....11.50*
Unit product cost.... ..... ..... .... .... .$45.40

Cost savings $2,724,000**
Cost to purchase (4,902,000)***
Add: Contribution margin 320,400
Net relevant cost $(1,857,600)

*($16.20 - $4.70)
**($45.40 oerunit x 60,000 units)
***($81.70 per units x 60,000 units)

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