Question

Use the information below to answer the following question(s):
Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:
Direct materials $4.00
Direct labour $4.00
Variable manufacturing overhead $3.00
Fixed manufacturing overhead $1.00
Total cost $12.00
The fixed overhead costs are unavoidable.
6. Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $9 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?
a. Make the part and save $6.00 per unit.
b. Make the part and save $2.00 per unit.
c. Buy the part and save $2.00 per unit.
d. Buy the part and save $6.00 per unit.

7. Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $14.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $8 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?
a. Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.
b. Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.
c. Continue to make the part to earn an extra $2.00 per unit contribution to profit.
d. Continue to make the part to earn an extra $4.00 per unit contribution to profit.

Answer 1

6)

	Make	Buy
Direct materials	(6000*$4)= $24000	-
Direct labor	(6000*$4)= 24000	-
Variable manufacturing overhead	(6000*$3)= 18000	-
Opportunity cost	24000	-
Purchase price	-	(6000*$9)= 54000
Total relevant cost	$90000	$54000

Company should buy the product as the total relevant cost of buying the product is less than making the product.

Company will save per unit= ($90000-54000)/6000= $6.00

So, the answer is D) Buy the part and save $6.00 per unit.

7)

	Make	Buy
Direct materials	(6000*$4)= $24000	-
Direct labor	(6000*$4)= 24000	-
Variable manufacturing overhead	(6000*$3)= 18000	-
Opportunity cost	(6000*$8)= 48000	-
Purchase price	-	(6000*$14)= 84000
Total relevant cost	$114000	$84000

Company should buy the product as the total relevant cost of buying the product is less than making the product.

Company will save per unit= ($114000-84000)6000= $5.00

So, the answer is A) Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.

NOTE:- For any problem regarding the answer please ask in the comment section.