Question

Aholt Company makes 40,000 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	$11.30
Direct labour	22.70
Variable manufacturing overhead	1.20
Fixed manufacturing overhead	24.70
Unit product cost	$59.90

An outside supplier has offered to sell the company all of these parts it needs for $46.20 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 $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 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.

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

$(328,000).

$264,000.

$(64,000).

$548,000.

Answer 1

Answer- The net total dollar (disadvantage) of purchasing the part rather than making it is = $(64000).

Explanation- Cost of making the part on 40000 units = Direct materials+ Direct labor+ Variable overhead+ Avoidable fixed overhead+ Opportunity cost (Contribution lost due to make such part)

= ($11.30 per unit+$22.70 per unit+$1.20 per unit+$2.80 per unit)*40000 units+ $264000

= ($38 per unit*40000 units)+ $264000

= $1520000+$264000

= $1784000

Where-Avoidable fixed manufacturing overhead per unit = Total Fixed manufacturing overhead per unit – Unavoidable fixed manufacturing overhead per unit

= $24.70 per unit - $21.90 per unit

= $2.80 per unit

Cost of part purchase from outside supplier = 40000 units*$46.20 per unit

= $1848000

Net total dollar (disadvantage) of purchasing the part rather than making it = Cost of purchase from outside supplier- Cost of making the part

= $1848000-$1784000

= $64000

Where- The unavoidable fixed cost have no effect on decision making, these cost are continue to occur whether such part  are manufactured or purchased.