Reference no: EM133162538

Question - Martell Corp. (MC) produces a part (product X) that is an input to several of its product lines. Cost data on the production of product X is as follows:

Direct materials $ 15

Direct labour 25

Variable overhead 20

Fixed overhead 60

$120

MC produces 12,000 units of product X each year (this is also the basis for fixed overhead allocation). A supplier has offered to supply product X for $75 per unit. If MC ceases manufacturing product X internally, then it will be able to lay off a supervisor with a salary of $55,000 per year. The factory space used by product X will be used to increase the production and sales of product Z, which has a contribution margin of $35 per unit. Product Z's sales would then increase by 2,500 units per year.

Required -

a) Calculate the incremental benefit or cost of making product X internally as opposed to purchasing it from an external supplier.

b) Calculate at what price MC should be indifferent between purchasing product X from the external supplier and making product X internally.