Reference no: EM132552814

Sidhu Inc. produce 20,000 units per year of a part that it uses internally. The unit product cost of this part is computed as follows:

Direct Materials                           $24.70

Direct Labour                              $16.30

Variable Manufacturing Overhead     $12.30

Fixed Manufacturing Overhead            $3.40

Unit Product Cost                               $56.70

• An outside supplier has offered to sell the company all the parts that Sidhu 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 1: How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?

Direct Materials

Direct Labour

Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Relevant Manufacturing Cost

Question 2: What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

Manufacturing Cost Savings

Additional contribution Margin

Less Cost of Purchasing the Part

Net Advantage (Disadvantage)

Question 3: 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?

Manufacturing Cost Savings

Additional Contribution Margin

Total Benefit

Number of Units

20,000

Benefit per Unit