1. Frogers Company produces 40,000 units per year of part it utilizes in products it produces. The unit product cost of this part is calculated as follows:
Direct materials $23.40
Direct labor 22.30
Variable manufacturing overhead 1.40
Fixed manufacturing overhead 24.60
Unit product cost $71.70
Outside supplier has offered to sell company all of these parts it requires for $59.20 a unit. If company accepts this offer, facilities now being used to prepare the part could be utilized to make more units of product that is in high demand. Extra contribution margin on this other product would be $352,000 per year.
If part were bought from outside supplier, all of direct labour cost of part would be avoided. Though, $21.90 of fixed manufacturing overhead cost being applied to part would continue even if part were bought from outside supplier. This fixed manufacturing overhead cost would be applied to company's remaining products.
Required:
a. How much of unit product cost of $71.70 is appropriate in decision of whether to make or purchase the part?
b. Compute the net total dollar advantage (disadvantage) of buying part rather than making it?
c. Determine the maximum amount company must be willing to pay the outside supplier per unit for part if supplier commits to supplying all 40,000 units needed each year?