Reference no: EM132729883

Problem - Foto Company makes 50,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials $12.00

Direct labour 10.10

Variable manufacturing overhead 2.00

Fixed manufacturing overhead 14.10

Unit product cost $38.20

An outside supplier has offered to sell the company all of these parts it needs for $37.30 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 $310,000 per year.

If the parts were purchased from the outside supplier, $9.70 of the fixed manufacturing overhead cost being applied to each part would continue to be incurred. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required -

(a) How much of the unit product cost of $38.20 is relevant in the decision of whether to make or buy the part?

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