Reference no: EM13325682

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
Direct materials
Direct labor
Variable manufacturing overhead
Variable transportation
Fixed manufacturing overhead
Purchase price
Profit contribution from another product
Total cost