Reference no: EM132517063

Outdoor Flames manufactures 5,000 outdoor gas fireplaces each period. The company has been manufacturing the ignition system for the fireplaces.

The unit cost of each ignition is as follows:

Direct Material                                               $12

Direct Labor                                                   5

Variable manufacturing overhead                         2

Fixed manufacturing overhead                           14

Unit product cost                                            $33

• A local supplier has offered to sell the company the ignition system for $30 each.
• If the ignition systems are purchased from the outside supplier, the facilities now being used to make them can be used to make other units of a product that is in high demand.
• The additional contribution margin on the other unit would be $42,000 per year.
• If the ignition systems are purchased from an outside supplier, all the direct labor would be avoided, but $8 of the fixed cost would continue and be applied to the remaining products even if the part is purchased.

Required:

Question a. How much of the unit product cost of $33 is relevant to the decision to make or buy the ignition systems?

Question b. What is the net total dollar advantage or disadvantage of purchasing the ignition systems rather than making them?

Question c. List three qualitative characteristics that the owner of Outdoor Flames should consider in looking at the long-term effect of purchasing the ignition systems.