Question

Pattup Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials ………………………… $11.30 Direct labor ………………………… .. 22.70 Variable manufacturing overhead ……… 1.20 Fixed manufacturing overhead ………… 24.70 Unit product cost …………………… $59.90 An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be rented out to earn $264,000 per year. $21.90 of the fixed manufacturing overhead cost being applied to the part are unavoidable and would remain even if the part was purchased from the outside supplier. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? A. $264,000 B. ($328,000) C. $548,000 D. ($64000)

Answer 1

Answer:

-$64000

Explanation:

The computation of net total is as shown below:-

Direct material = $11.30

Direct labor = $22.70

Variable manufacturing overhead = $1.20

Fixed manufacturing overhead ($24.70 - $21.90) = $2.80

Total Relevant cost = Direct material + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $11.30  + $22.70  + $1.20  + $2.80

= $38.00

Total Cost of Making = Relevant cost per unit × Number of Unit + Opportunity contribution margin lost

= $38 × 40,000 + $264000

= $1,784,000

Total Cost of Buying = $46.20 × 40,000

= $1,848,000

Net total = Total Cost of Making - Total Cost of Buying

= $1,784,000 - $1,848,000

= -$64000