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Question - XYZ Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed 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
An outside supplier has offered to sell the company all of these parts it needs for $59.20 a unit.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
Required -
a. Explain differential analysis and relevant and irrelevant costs?
b. How much of the unit product cost of $71.70 is relevant in the decision of whether to make or buy the part?
c. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
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