Problem 1 - Assume that a company makes 30,000 units of Part A each year. At this level of production, the companys accounting system reports the following cost per unit:

Direct materials	$ 16
Direct labor	10
Variable manufacturing overhead	4
Fixed manufacturing overhead	8
Total cost per unit	$ 38

An outside supplier has offered to sell the company 30,000 parts per year for a price of $33 per part. The company believes that $155,000 of the fixed manufacturing overhead cost being allocated to this part will continue to be incurred even if the part is purchased from the outside supplier. What is the financial advantage (disadvantage) of buying the parts from the outside supplier?

Differential Analysis

Particulars Making Part A Buying Part A Financial Advantage (Disadvantage)

Costs:

Purchase Price $0.00 $990,000.000 (990,000.00)

Direct materials $480,000.00 $0.00 $480,000.00

Direct Labor $300,000.00 $0.00 $300,000.00

Variable overhead $120,000.00 $0.00 $120,000.00

Fixed overhead $85,000.00 $0.00 $85,000.00

Total cost $985,000.00 $990,000.00 (5,000)

Problem 2 - Assume a company manufactures many products, one of which normally sells for $48 per unit. The companys accounting system reports the following unit product cost for this product:

	Per Unit
Direct materials	$ 18
Direct labor	12
Manufacturing overhead	10
Total cost	$ 40

The company estimates that $3 of its manufacturing overhead varies with respect to the number of units produced. The remainder of its overhead is fixed and unaffected by the volume of units produced within the relevant range. A customer has approached the company with an offer to buy 300 units of a customized version of the product mentioned above for $39. The company can fulfill this order using existing manufacturing capacity. To accommodate the customers desired product design, the company would incur additional direct materials cost per unit of $3. It would also have to buy a special tool for $510 that has no other use or resale value after the special order is completed. Assuming that accepting this order will not have any effect on sales to other customers, what is the financial advantage (disadvantage) of accepting the special order?

Financial advantage (disadvantage) of accepting the special order

Additional Revenue from offer ($39*300) $11,700

Less: Total Additional cost due to acceptance of offer $11,310

Financial advantage $390

Calculation of Additional cost of order

Per unit Total

Direct material $21.00 $6,300

Direct labor $12.00 $3,600

Variable manufacturing overheads $3.00 $900

Additional fixed cost $510.00

Total Additional cost due to acceptance of order $36.00 $11,310