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Sharp Image Company makes a part used in the manufacture of video cameras. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $21.30 per part. Sharp Image needs 100,000 parts per year. The cost of manufacturing 100,000 parts is computed as follows:
Direct materials
$ 765,000
Direct labor
612,000
Variable manufacturing overhead
510,000
Fixed manufacturing overhead
663,000
Total manufacturing costs
$2,550,000
If Sharp Image buys the part, it would pay $.30 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 35% of fixed manufacturing overhead costs. Sharp Image's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $75,000.
Prepare an analysis to show which alternative makes the best use of Sharp Image's factory space:
1) make the part
2) buy the part and leave facilities idle
3) buy the part and use facilities to make another product
Answer:
Make the Part
Buy part and leave facilities idle
Buy part and use facilities to make another product
Variable transportation
Purchase price
Profit contribution from another product
Total cost
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