Abolt Corporation makes 40,000 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 $11.30 direct labour $22.70 variable manufacturing overhead $1.20 fixed manufacturing overhead $24.70 unit product cost $59.90 An outside supplier has offered to sell the company all of these parts it needs for $46.20 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 $264,000 per year. Additionally, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. Required: I. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? II. Calculate the maximum amount per unit the company should be willing to pay an outsider supplier for the part if the supplier commits to supplying all 40,000 units required each year.
Abolt Corporation makes 40,000 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 | $11.30 |
| direct labour | $22.70 |
| variable manufacturing |
$1.20 |
| fixed manufacturing overhead | $24.70 |
| unit product cost | $59.90 |
An outside supplier has offered to sell the company all of these parts it needs for
$46.20 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
$264,000 per year. Additionally, $21.90 of the fixed manufacturing overhead
cost being applied to the part would continue even if the part were purchased
from the outside supplier.
Required:
I. What is the net total dollar advantage (disadvantage) of purchasing the part
rather than making it?
II. Calculate the maximum amount per unit the company should be willing to
pay an outsider supplier for the part if the supplier commits to supplying all
40,000 units required each year.
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