Toblerone corporation manufactures part X-24 for use in its production cycle. The cost per unit for 10,000 units of part X-24 are as follows:

Direct Materials 6.00

Materials handling costs (20%) 1.20

Direct Labor 20.00

Variable Overhead 5.00

Fixed overhead 11.00

Total 43.20

Ferrero Company has offered to sell Toblerone Corporation 10,000 units of part X-24 for 40 per unit.

If Toblerone accepts Ferreros offer, 4 of the fixed overhead per unit could be eliminated. The materials handling costs pertaining to the cost of receiving and inspecting of incoming materials and other components are not included in the overhead.

If the part is outsourced from an outside supplier, one half of the released facilities could be used to produce a new product, Citrus, which is expected to generate a contribution margin of 90,000 a year. Additionally, savings of 15,000 are expected if the parts are purchased outside. The other half of the released facilities could be rented out for 60,000 per annum.

Ferrero Company requires that an equipment be leased to meet the order of Toblerone Corporation. The equipment rental cost of 80,000 shall be charged to the buying company.

Show your supporting computation.

Required:

1. What alternative is better, make or buy the part and by how much is its advantage?

2. Indifference price of the two alternatives.

3. Purchase price to have a savings of 10.00 per part.

4. The sunk cost (or irrelevant cost) in the decision making or buying part.