Question $3(10$ marks$)$

Glow Company is presently making a light that is used as a component in one of its

products. Annual required production is $20,000$ units. The unit product costs for the

light are:

Direct materials

$.$ $$24\mathrm{.}70$

Direct labour

Variable manufacturing overhead

Fixed manufacturing overhead

Total unit product cost

$$56\mathrm{.}70$

An outside supplier has offered to sell Glow this component for $$51\mathrm{.}80$ a unit. If the

company accepts this offer, the factory space 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 $$44,000$ per year.

If the part were purchased from the outside supplier, all the direct labour cost of

the part would be avoided. However, $$5\mathrm{.}10$ of the fixed manufacturing overhead

cost that is 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:

a$)$ How much of the unit product cost of $$56\mathrm{.}70$ is relevant in the decision of

whether to make or buy the part?

b$)$ What is the net total dollar advantage $($disadvantage$)$ of purchasing the part

rather than making it$?$

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 $20,000$ units

required each year?