Specter Company makes 20,000 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 $25.10 Direct labour 18.20 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 13.40 Unit product cost $56.70 An outside supplier has offered to sell the company all these parts it needs for $56.00 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 $50,000 per year. If the part were purchased from the outside supplier, all the direct labour cost of the part would be avoided. However, $5.10 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: Part a: Calculate the relevant manufacturing cost for this decision. In your calculation you must identify all the relevant costs along with their amounts. Part b: What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? Show all your calculations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Specter Company makes 20,000 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 $25.10
Direct labour 18.20
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 13.40
Unit product cost $56.70
An outside supplier has offered to sell the company all these parts it needs for $56.00 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 $50,000 per year.
If the part were purchased from the outside supplier, all the direct labour cost of the part would
be avoided. However, $5.10 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:
Part a:
Calculate the relevant manufacturing cost for this decision. In your calculation you must identify
all the relevant costs along with their amounts.
Part b:
What is the net total dollar advantage (disadvantage) of purchasing the part rather than making
it? Show all your calculations.

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