Question
ABC Company makes 40,000 units per year of Part X that it uses in the products it manufactures. The per-unit cost of this part is
ABC Company makes 40,000 units per year of Part X that it uses in the products it manufactures. The per-unit cost of this part is computed as follows:
Direct materials: $13.80 Direct labor: $18.10 Variable Manufacturing OH: $4.30
In addition, total Fixed manufacturing OH allocated to Part X production = $984,000, or $24.60 per unit of Part X.
An outside supplier has offered to sell the company Part X for $51.80 per unit. If Part X were purchased from the outside supplier instead of making it in-house, $680,000 of the total fixed manufacturing overhead being allocated to Part X would still continue. This fixed manufacturing overhead cost would have to be allocated to the company's remaining products. The remaining fixed cost could be avoided.
1. Should the company accept the outside suppliers offer to supply Part X as mentioned above?
2. Suppose, if the company accepts this offer, the facilities now being used to make Part X could be used to make more units of Product PQR that is in high demand. The additional contribution margin on Product PQR would be $368,000 per year. Now should the company accept the outside suppliers offer?
3. What is the maximum total amount the company should be willing to pay any outside supplier for Part X and remain indifferent between making and buying Part X, if the supplier commits to supplying all 40,000 units required each year?
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