Question -
HD Corporation manufactures vehicles parts. When its production facilities are fully utilized it uses external sub-contractors to complete some orders. Management is reconsidering the uses of its manufacturing facilities for the coming year. The following table details the cost of producing a motor called the WB 13 used in the cooling system. Total cost for 60,000 units Direct Materials $ 480,000 Direct Labour 360,000 Variable production overheads 180,000 Fixed production overheads 360,000 Total manufacturing cost $1,380,000 One of the external producers has offered to supply HD Corporation with the same part for $ 21 each. If the part is purchased externally; related fixed cost to the production of this part of $ 120,000 will be avoided.
Required:
a. What is the relevant per unit cost for the original part it assumed that the capacity now used to manufacture this part will become idle and should the part be made or bought?
b. Assume that the capacity now being used to manufacture this part can be either (a) rented to earn $ 75,000 per or (b) be used to make oil filters that will yield a profit contribution of $ 240,000. What is the best decision for HD Corporation management to propose?