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X Corporation X Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 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 $273,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 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. Required: 1. Articulate the problem by answering the following questions ( 9 Marks - 3 Marks - Each): a) Why is the company considering buying rather than making? b) How much of the unit product cost of $54.90 is relevant in the decision of whether to make or buy the part? c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year? 2. Compute the financial advantage/disadvantages of buying for a year. (To get credit, you should show all computations) (3 Marks) 3. Based on your answers to questions 1 and 2, and any other relevant information provided in the case, what possible actions/solutions do you propose the company takes? (3 Marks) (Name as many as you can think of) 4. Based on your answers to questions 2 and 3 , evaluate the potential solutions/actions by considering the history of the problem, the feasibility of your recommendations, and the impacts of this decision on the company's financial situation. (3 Marks) 5. By considering the information provided in the case as well as what you have computed/provided above, discuss your conelusion. Would you recommend X Corporation buy rather than make? ( 2 Marks) X Corporation X Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 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 $273,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 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. Required: 1. Articulate the problem by answering the following questions ( 9 Marks - 3 Marks - Each): a) Why is the company considering buying rather than making? b) How much of the unit product cost of $54.90 is relevant in the decision of whether to make or buy the part? c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year? 2. Compute the financial advantage/disadvantages of buying for a year. (To get credit, you should show all computations) (3 Marks) 3. Based on your answers to questions 1 and 2, and any other relevant information provided in the case, what possible actions/solutions do you propose the company takes? (3 Marks) (Name as many as you can think of) 4. Based on your answers to questions 2 and 3 , evaluate the potential solutions/actions by considering the history of the problem, the feasibility of your recommendations, and the impacts of this decision on the company's financial situation. (3 Marks) 5. By considering the information provided in the case as well as what you have computed/provided above, discuss your conelusion. Would you recommend X Corporation buy rather than make? ( 2 Marks)
