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For many years, ABC has produced an electrical part that it uses in the production of diesel tractors. The company's unit product cost for the
For many years, ABC has produced an electrical part that it uses in the production of diesel tractors. The company's unit product cost for the part, based on a production level of 60,000 parts per year, is as follows: Per Part Total Direct materials Direct labour $4.00 2.75 Variable manufacturing overhead 0.5 Fixed manufacturing overhead 300 $180,000 Unit product cost $10,25 An outside supplier has offered to supply to electrical part to ABC for only $10,00 per part One-third of the fixed manufacturing cost is supervisory salaries and the costs that can be eliminated if the parts are purchased. The other two-thirds of the fixed manufacturing costs consist of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle, Instructions (a) How much profit would increase or decrease as a result of purchasing the parts from the outside supplier rather than having the company make them. (7 marks) (b) Assume that if the company outsource the part to the outside supplier it can utilize the free capacity by manufacturing a product with a margin of $95,000. Should the company accept the outside supplier's offer
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