Potter Company is vertically integrated and currently produces a part that it uses to manufacture one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows: Direct Materials $3 Direct Labor $ 5 Variable Manufacturing Overhead $4 Fixed Manufacturing Overhead $ 2 Total Cost $14 The Fixed overhead costs are unavoidable. 1.) Elmo Industries has offered to sell 5,000 units of the same part to Potter for $13 per unit. Assuming Potter has no other use for its facilities what should Potter do? 2.) Assume Potter can purchase 5,000 units of the part from Coyne for $15 each and the facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. What should Potter do? 3.) Assume Potter can purchase 5,000 units of the part from Campigotto Company for $14 each, and the facilities currently used to manufacture the part could be used to manufacture 5,000 units of another product that would contribute $5.00 per unit to fixed costs. If no additional fixed costs would be incurred, what should Potter do? What are the incremental cash flows?

Your final production cost will be less after deducting your variable costs multiplied by the quantity you produced. This will cover all of your fixed expenses. Fixed costs are those that are not affected by volume. The majority of fixed costs are outlays that are more time-dependent than they are production- or sales-related. Rent and leasing fees, salaries, energy prices, insurance premiums, and loan repayments are examples of fixed costs. Fixed costs, or expenses that never fluctuate, are unaffected by changes in sales or production volumes.

Why is fixed cost important?

The ability to predict a company's present and future financial needs makes fixed expenses crucial. Your expenses could go down and your profits could go up if you reduce your fixed costs. Your profit margin may rise as a result of this. The ability to predict a company's present and future financial needs makes fixed expenses crucial. Your expenses could go down and your profits could go up if you reduce your fixed costs. Your profit margin may rise as a result of this.

Briefing:

Fixed manufacturing overhed = $2

Total cost=$14

The fixed overhead costs are unavoidable which means that the total cost of making the product should be net of this amount:

=14-2

=$12

This means the company incurs $12 per unit produced. If they made it themselves.

=Cost of buying – Cost of making

=14-12

=$2

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