Tommy Company produces (makes) the part used in the manufacture of one of its products. The costs associated with the production of 11,000 units follow:

Direct material - direct material $25,000
Direct labor - Direct labor 34,000
Variable Costs - variable manufacturing costs 65,000
Fixed costs - fixed manufacturing costs 50,000*
Total costs to make $174,000
======
*Of fixed manufacturing costs, $9,000 is avoidable.

Offer to Buy (Buy):

One supplier, List Manufacturing, offers to make all 11,000 pieces to the Tommy Company in the same quality for $12.50 per unit; totaling $137,500.
   
required:
1. Determine the fixed cost irrelevant to the decision. Explain what it means.
2. How much would Tommy Company save if it bought the parts from List Manufacturing?
3. If you are Tommy's manager, what decision would you make, make them or compare them?
4. Would your answer change if the company could rent the space dedicated to making the part for $10,000, if they decided to buy them? Show calculations.
5. List some qualitative factors to support your decision.

Answer rating: 100% (QA)

1 Fixed Cost Irrelevant to the Decision The fixed cost that is irrelevant to the decision is the avoidable fixed cost In this case 9000 of the total f... View the full answer