Reference no: EM132510824

Ombogo Lted makes 20,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct Materials

Direct Labour                                 $24.70

Variable Manufacturing Overhead        $16.30

Fixed Manufacturing Overhead             $2.30

Unit Product Cost                                $13.40

                                                         $56.70

• An outside supplier has offered to sell that Ombogo Ltd. needs for $51.80 a unit. If the company accepts this offer, the facilities now being 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 $44,000 per year.
• If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is 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:

Question 1a) How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?

Question 1b) What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

Question 1c) What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?

The following is the standard cost card for Cortez Corp.'s only product:

Direct materials, 4 metres at $4.00                    $16.00

Direct labour, 5 hours at $10.00                          $15.00

Variable overhead, 1.5 hours at $3.00                    $4.50

Fixed overhead, 1.5 hours at $7.00                     $10.50

Standard cost per unit                                    $46.00

• The company manufactured and sold 18,000 units of product during the year. A total of 70,200 metres of material was purchased during the year at cost of $4.20 per metre. All of this material was used to manufacture the 18,000 units. The company records showed no beginning or ending inventories for the year.
• The company worked 29,250 direct labour hours during the year at a cost of $9.75 per hour. Overhead cost is applied to products on the basis of direct labour hours. The denominator activity level (direct labour hours) was 22,500 hours. Budgeted fixed overhead costs as shown on the flexible budget were $157,500, while actual fixed overhead costs were $156,000. Actual variable overhead costs were $90,000.

Required:

Question 2a) Compute the direct materials price and quantity variances for the year.

Question 2b) Compute the direct labour rate and efficiency variances for the year.