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The No-Win Company makes 20,000 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……………… $24.70
Direct labor…………………. 16.30
Variable manufacturing overhead… 2.30
Fixed manufacturing overhead…… 13.40
Unit product cost………….. $56.70
An outside supplier has offered to sell the company all of these
parts it needs at $51.80 a unit. If No-Win accepts this offer, the
facilities now being used to make the part could be leased to another
company. The incremental contribution margin from leasing the space
would be $44,000 per year.
If the part were purchased from the outside supplier, all of the
variable costs of the part would be avoided. However, $5.10 of the fixed
manufacturing overhead cost being applied to the part would continue
even if the part were purchased from the outside supplier. This fixed
manufacturing overhead cost ($5.10) would be applied to the company’s
remaining products. Ignore income taxes and the time value of money in
1. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
2. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
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? They will still lease the
facility if they purchase from an outside supplier