Reference no: EM132802002

Question - Habib Company Direct Materials $11.30 Direct Labour $22.70 Variable Manufacturing Overhead $1.20 makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is as follows:

Fixed Manufacturing Overhead $24.70

Unit Product Cost $59.90

An outside supplier has offered to sell the company all the parts that Habib needs for $46.20 a unit. If the company accepts this offer, the facilities now used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.

If Habib purchases from the outside supplier, all direct labour cost of the part would disappear. However, $21.90 of the fixed manufacturing overhead cost applied to the part would continue, even if the part was purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required -

a. How much of the unit product cost of $59.90 is relevant in the decision of whether to Make or Buy the part? Please show all work for any calculations performed.

b. What is the net Total Dollar Advantage (Disadvantage) of purchasing the part, rather than making it?

c. What is the maximum amount Habib Company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

d. Assume the outside supplier agrees to the new price you calculated in part 3. List three (3) other non financial things Habib Company should consider before going with the outside supplier.