Answer:
a)
Production costs for part U67:
Direct materials $1.80 x 14,900 units = $26,820
Direct labor $2.80 x 14,900 units = $41,720
Variable overhead $5.60 x 14,900 units = $83,440
Supervisor's salary $6.10 x 14,900 units = $90,890
Depreciation of special equipment $7.20 x 14,900 units = $107,280
Allocated general overhead $4.30 x 14,900 units = $64,070
total production costs = $414,220
cost of purchasing the units from outside supplier:
14,900 units x $22 purchase price = $327,800
unavoidable fixed costs = $107,280 + ($64,070 - $20,900) = $150,450
total costs associated to purchasing units = $478,250
Financial disadvantage of purchasing the part from outside supplier instead of producing it = $414,220 - $478,250 = ($64,030)
b)
the company should continue to produce part U67 since the relevant costs associated to purchasing it from an outside vendor would result in a financial disadvantage for the company.
