Question

Foto Company makes 10,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials $ 13.00 Direct labor 20.60 Variable manufacturing overhead 2.80 Fixed manufacturing overhead 10.70 Unit product cost $ 47.10 An outside supplier has offered to sell the company all of these parts it needs for $42.10 a unit. If the company accepts this offer, the facilities now be

Answer 1

Answer and Explanation:

a. The computation is shown below:

Relevant cost per unit on make or buy :

Particulars                    Make                 Buy

Direct material       13.00  

Direct labor               20.60  

Variable manufacturing

overhead                 2.80  

Fixed manufacturing

overhead                 5.30  

Purchase cost                          42.10

Total relevant cost per unit 41.70 42.10

b) So the advantage in case of purchasing the part instead of making it

= (Making relevant cost - buying relevant cost × number of units) - additional contribution margin  

= ($41.70 - $42.10 × 10,000 units) - $36000

=  $32000