Problem - Leland Manufacturing uses 10 units of part KJ37 each month in the production of radar equipment. The accountant says that Leland's cost for manufacturing each unit of KJ37 is as presented below.
Direct materials $1,000
Direct labor 8,000
Materials handling (20% of direct material cost) 200
Testing equipment 3,000
Other manufacturing overhead 12,000
Total manufacturing cost $24,200
Scott Supply, one of Leland's reliable vendors, has offered to supply part KJ37 at a unit price of $15,000.
If Leland were to purchase part KJ37, materials handling costs would not be incurred.
The testing equipment is a special one for part KJ37 and is under a long term, noncancelable lease.
Leland's other manufacturing overhead is one third variable (with units produced) and two -thirds fixed.
Required:
a. If Leland purchases the KJ37 units from Scott, the capacity Leland was using to manufacture these parts would be idle. Should Leland purchase the parts from Scott?
b. Assume Leland Manufacturing is able to rent all idle capacity for $25,000 per month. Should Leland purchase from Scott Supply?
c. Assume that besides the rental possibility, Leland could use idle capacity to manufacture another product that would contribute $52,000 per month. Should Leland manufacture KJ37?