Question
3. Problem Set #2 Page 4 of 17 Assume that Pitch Corp. continues to produce and sell at a volume of 140,000 units during
3. Problem Set #2 Page 4 of 17 Assume that Pitch Corp. continues to produce and sell at a volume of 140,000 units during 2022. This volume utilizes approximately 90.0% of the Company's production capacity. In May 2022, the production manager received an offer from a vendor to provide a component used in the production of Pitch Corp.'s product. Each unit produced by Pitch Corp. requires two components. The vendor would supply the 280,000 components needed (140,000 units X 2 components per unit) for one year of the planned production at a delivered cost of $18.40 per unit. Pitch Corp. would incur additional costs of $0.30 per unit to inspect the components and $1.75 per component to prepare them for inclusion in their final product. Cost data relative to the production of 280,000 components by Pitch Corp. reveals: Direct Materials Direct Labor Variable Overhead Fixed Overhead $11.00 per unit $ 3.50 per unit. $2.40 per unit $1,120,000 The production manager estimates that Pitch Corp. could eliminate $756,000 of the fixed costs allocated to the component if it outsourced its production of the vendor. The Company could use the freed-up capacity to produce $295,000 of additional contribution margin from producing another product. a. Analyze the decision by identifying the relevant costs. Present the relevant costs and their total amounts in the table below. You will not use all of the lines for at least one of the alternatives. (8 points) Make Alternative: 280,0000 components Buy Alternative: 280,000 Components Total Cost to Make Total Cost to Buy b. From a profitability perspective, should Pitch Corp. make or buy the component? Briefly explain. (2 points) Brief Explanation Required:
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