Acc 600 CASE 3

Presented below are four independent situations which you as a Manager Trainee employed with Your Company have been asked to evaluate. Evaluate each situation based on what each requires. To receive a promotion depends upon how your respond.
Situation One
Your Company makes 45,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct material $16.00
Direct labor 20.00
Variable manufacturing overhead 5.00
Fixed manufacturing overhead 23.00
Unit product cost $64.00

An outside supplier has offered to sell the company all of these parts it needs for $53.00 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 $275,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $16.00 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:
a. How much of the unit product cost of $64.00 is relevant in the decision of whether to make or buy the part?
Relevant cost per unit $
Direct materials-$16.00
Direct labor- $20.00
Variable manufacturing overhead-$5.00
Fixed manufacturing overhead-$7.00
Relevant manufacturing\ cost-$48.00

b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
Relevant cost of making part@48/per unit-$2,160,000.00
Cost of purchase at 53 per unit-$2,385,000.00
Benefits of facilities (additional contribution margin)-$275,000