Foto Company makes 16,000 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 $13.80 Direct labor 21.40 Variable manufacturing overhead Fixed manufacturing overhead 3.60 Unit product cost 11.50 $50.30 An outside supplier has offered to sell the company all of these parts it needs for $42.90 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 $24,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.80 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. Required: a. How much of the unit product cost of $50.30 is relevant in the decision of whether to make or buy the part? (Round "Per Unit" to 2 decimal places.) b. What is the financial advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 16,000 units required each year? (Round "Per Unit" to 2 decimal places.) a. Relevant manufacturing cost per unit b. c. Maximum acceptable purchase price per unit
Foto Company makes 16,000 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 $13.80 Direct labor 21.40 Variable manufacturing overhead Fixed manufacturing overhead 3.60 Unit product cost 11.50 $50.30 An outside supplier has offered to sell the company all of these parts it needs for $42.90 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 $24,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.80 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. Required: a. How much of the unit product cost of $50.30 is relevant in the decision of whether to make or buy the part? (Round "Per Unit" to 2 decimal places.) b. What is the financial advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 16,000 units required each year? (Round "Per Unit" to 2 decimal places.) a. Relevant manufacturing cost per unit b. c. Maximum acceptable purchase price per unit
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Foto Company makes 16,000 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
$13.80
Direct labor
21.40
Variable manufacturing overhead
Fixed manufacturing overhead
3.60
Unit product cost
11.50
$50.30
An outside supplier has offered to sell the company all of these parts it needs for $42.90 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 $24,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.80 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.
Required:
a. How much of the unit product cost of $50.30 is relevant in the decision of whether to make or buy the part? (Round "Per Unit" to 2
decimal places.)
b. What is the financial advantage (disadvantage) of purchasing the part rather than making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits
to supplying all 16,000 units required each year? (Round "Per Unit" to 2 decimal places.)
a. Relevant manufacturing cost
per unit
b.
c. Maximum acceptable purchase price
per unit
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