1-3) Make or Buy.Granger Company makes 50,000 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....................................................P19.10

Direct labor ...........................................................21.70

Variable manufacturing overhead ............. 2.10

Fixed manufacturing overhead.....................14.20

Unit product cost ................................................P57.10

An outside supplier has offered to sell the company all of these parts it needs for P50.10 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 P135,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, P9.30 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.

1. How much of the unit product cost of P57.10 is relevant in the decision of whether to make or buy the part?

2. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

3. What is the indifference point between making and buying the part? Comment on your answer.

4-8) Special Order. Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below:

Per Unit Data Selling price...................................................... P150

Direct materials................................................ P26

Direct labor ...................................................... P3

Variable manufacturing overhead ................... P1

Fixed manufacturing overhead........................ P17

Variable selling expense................................... P2

Fixed selling and administrative expense ........ P18

The above per unit data are based on annual production of 8,000 units of the component. Direct labor can be considered a variable cost.

4. The company has received a special, one-time-only order for 500 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Dockwiller has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

5. The company has received a special, one-time-only order for 300 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Dockwiller has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of P1,800. What is the minimum price per unit on the special order below which the company should not go?

6. Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of P150 and its annual production of 8,000 units?

7. The company has received a special, one-time-only order for 500 units of component D53. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Dockwiller has excess capacity of 400 units only, what is the minimum price per unit on the special order below which the company should not go?

8. Now, assume that the order price set by the buyer is P33. What is the maximum regular unit sales which can be forgone before the special order be rejected?

19-20) Adding a Product Line. The Clint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales............................................... 4,000 units

Unit selling price ........................................ P58

Unit variable costs: Production............ P34

Selling................................................................ P4

Avoidable fixed costs per year:

Production................................................... P20,000

Selling............................................................ P30,000

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Clint will drop by P7,000 per year.

19. If the F-27 product line is added next year, the change in operating income should be:

20. What is the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint to add the new product line?