Sagnik B.

asked • 01/14/15

Make or Buy Decision Question Managerial Accounting

Ahron Company makes 8,000 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 : $14.90
Direct Labor : $17.50
Variable Manufacturing Overhead : $1.90
Fixed Manufacturing Overhead : $21.10
Unit Product Cost : $55.40
 
An outside supplier has offered to sell the company all of the units it needs. If the company accepts this offer, the facilities now being used to make this part would be used to make more units of a product in high demand. The additional contribution margin on the other product would be $161,600 per year. If the part were purchased from the outside supplier, $7.50 of the fixed manufacturing overhead cost being applied to the part would be eliminated. What is the maximum amount the company should be willing to pay an outside supplier for part if supplier commits to supplying all 8,000 units required for the year?
 
A) 49.50 B) 62.00 C) 48.80 D) 55.40 E) None of above
 
Answer was C) but I need help with steps as to how and why.
 
Thanks.

Yoel J.

Yes, the correct answer is (C), How?
 
As the question tell us about the additional contribution margin which the company will earn if it makes units of a product in high demand, which is $161,600 means per unit earning = $161,600/8000 = $20.20 per unit
 
If company buys product from outside supplier, it saves $7.50 in fixed FOH.
Hence, the Balance Fixed FOH will be $21.10 - $7.50 = $13.60
 
Now deduct $13.60 from the per unit contribution margin of the another product in demand = $20.20 - $13.60 = $6.60
 
Now deduct $6.60 out of the total manufacturing cost of the main product = $55.40-$6.60 = $48.80.
 
 
Report

10/12/15

1 Expert Answer

By:

Sam L H. answered • 11/17/15

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