Problem 1: When there is a production constraint, a company should emphasize the products with:
- the highest unit contribution margins
- the highest contribution margin ratios
- the highest contribution margin per unit of constrained resource
- the highest contribution margins and contribution margin ratios
Problem 2: Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows:
Direct Materials...............................................$18,000
Direct Labor......................................................20,000
Variable Manufacturing Overhead................... 12,000
Fixed Manufacturing Overhead....................... 30,000
Total Costs.......................................................80,000
An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon stops producting the part internally, one-third of the manufacturing overhead would be eliminated.
Required: Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.