Question

Xenon Corp. makes 63,200 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 material	$21.30
Direct labor	$24.60
Variable manufacturing overhead	$7.35
Fixed manufacturing overhead	$30.60
Unit product cost	$83.85

An outside supplier has offered to sell the company all of the 63,200 parts it needs for $78.50 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 $365,750 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, 63% 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 would be applied to the company's remaining products.

Questions

1. How much of the unit product cost of $83.85 is relevant in the decision of whether to make or buy the part?

my answer= $64.57

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

my answer= $-514,500

3. Should Xenon continue to manufacture the part or buy it?

4. What effect do fixed costs have on the answer you gave for Question 3?

5. What would have to happen to fixed costs for your answer to Question 3 to be different?

6. 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 63,200 units required each year?

my answer= $70.36

I feel like my answers so far are correct, but would like to make sure. Help with the other question are much appreciated.

Answer 1

1)	The relevant unit cost = 21.30+24.60+7.35+30.60*37% =	$             64.57
2)	Net dollar advantage (disadvantage):
	Variable costs saved = (21.30+24.60+7.35)*63200 =	$     33,65,400
	Fixed costs saved = 30.60*37%*63200 =	$       7,15,550
	Purchase cost = 78.50*63200 =	$   -49,61,200
	Net dollar advantage (disadvantage):	$     -8,80,250
	or 63200*(78.50-64.57) =	$       8,80,376
3)	Xenon should continue to manufacture the part as purchasing gives
	net dollar disadvantage.
4)	The fixed costs of 30.60*63200 = $1,933,920, are not avoided in full
	if the part is purchased. The partial savings of 37% act as a benefit
	for purchasing but, not to the extent to make purchasing beneficial.
5)	The savings in fixed costs should be more than 880250+715550 =		$     15,95,800
	for purchasing to be beneficial.
6)	Maximum that can be paid = (3365400+715550)/63200 =	$             64.57