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FDR Corp. estimates it will produce 30,000 units of a part that goes into its final product. It currently produces this part internally, but is
FDR Corp. estimates it will produce 30,000 units of a part that goes into its final product. It | |||||||
currently produces this part internally, but is considering outsourcing this activity. Current | |||||||
internal capacity permits for a maximum of 60,000 units of the part. The production manager | |||||||
has prepared the following information concerning the internal manufacture of 60,000 units | |||||||
of the part: | |||||||
Per unit | |||||||
Direct materials | $3.00 | ||||||
Direct labor | 4.00 | ||||||
Variable overhead | 5.00 | ||||||
Fixed overhead | 6.00 | ||||||
Total cost | $18.00 | ||||||
The fixed overhead of $6 per unit includes a $1.50 per unit allocation for salary paid to a | |||||||
supervisor to oversee production of the part. The fixed costs would not be reduced by | |||||||
outsourcing, except the supervisor would be terminated. Assume that if FDR outsources, | |||||||
its purchase price from the oursourcer is $12 per unit. | |||||||
REQUIRED: | |||||||
a. Should FDR outsource? Provide support for your answer. | |||||||
b. Assume FDR has received a special order for 10,000 units of the part from Alpha Corp. | |||||||
Alpha will pay FDR $23 per part, but will take the parts only if they have been manufactured | |||||||
by FDR. Thus, Alpha will engage in the special order only if FDR does not outsource any | |||||||
of its production. Should FDR accept the special order? Explain why or why not. |
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