Question

erry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $108,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Cost per Unit Direct materials $ 27 Direct labor 16 Variable overhead 14 Allocated fixed overhead 6 Required: 1. What is the relevant cost per unit to make the product internally? 2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?

Answer 1

Answer:

The Company will use the 64 unit cost for the make scenario

and use the 54 for the buy plus the fixed cost (6x 2000)

In the short term, when the fixed cost are unavoidable, the operating profit will increase to 6,000

in the long-term, the operating profit will increase to 18,000

Explanation:

Direct Materials 27

Direct Labor      16

Variable Overhead 14

Fixed Overhead      6

Total unit cost  63

Total Variable Cost 57

Offered Unit cost

108,000/2,000 = 54

Unit Cost               $63.00              $54.00              $9.00

Total Cost  $126,000.00   $108,000.00     $18,000.00

Unavoidable Fixed Cost   $12,000.00            -$12,000.00

Total Cost  $126,000.00   $120,000.00       $6,000.00