Reference no: EM132710397
Dell Inc. makes 1,000 units per year of a part called Optical Drives for use in one of its products. Data concerning the unit production costs of the optical drives follow:
Direct materials $342
Direct labour 80
Variable manufacturing overhead 48
Fixed manufacturing overhead 520
Total manufacturing cost per unit $990
An outside supplier has offered to sell Dell Inc. all of the optical drives it requires. If Dell decided to discontinue making the optical drives, 10% of the above fixed manufacturing overhead costs could be avoided.
Required (show your calculations):
Problem i. Assume Dell has no alternative use for the facilities presently devoted to the production of the optical drives. If the outside supplier offers to sell the optical drives for $850 each, should Dell accept the offer? Fully support your answer with appropriate calculations
Problem ii. Assume that Dell could use the facilities presently devoted to production of the optical drives to expand production of another product that would yield an additional contribution margin of $50,000 annually. What is the maximum price Dell should be willing to pay the outside supplier for each unit optical drives? Show your calculations.
Problem iii. With reference to (i) and (ii), discuss four other factors that managers need to consider in order to make a more informed decision about whether to buy the part from the outside suppliers or not.
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