Question

Tish Corporation makes 5,000 units of a part call Greentron for use in one of its products. Data concerning the unit production costs of the Greentron follow: Direct materials $10 Direct labor $7 Variable manufacturing overhead $1 Fixed manufacturing overhead $12 Unit product cost $30 [note] The total fixed manufacturing overhead is 12×5,000= 60,000. An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $25 each. The company estimates that 40% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision.

1. If Tish Corp. Has no alternative use for the facilities presently devoted to the production of the product, should Tish accept the offer by the outside supplier? Fully support your answer with appropriate calculations.

2. If the space used to make Greentron may be freed up and rented out for $20,000, should Tish accept the offer by the outside supplier? Fully support your answer with appropriate calculations.

Answer 1

1. If Tish Corp. Has no alternative use for the facilities presently devoted to the production of the product, should Tish accept the offer by the outside supplier? Fully support your answer with appropriate calculations.

Relevant cost to make:-

Direct materials	$10
Direct Labor	$7
Variable overhead	$1
Fixed overhead ($12 * 40%)	$4.80
Relevant Cost of make each unit	$22.80

Relevant cost of buying = $25

Tish corp. should not accept the offer by the outside supplier due to higher cost.

2. If the space used to make Greentron may be freed up and rented out for $20,000, should Tish accept the offer by the outside supplier? Fully support your answer with appropriate calculations.

Rented out freed space	$20000
Lost contribution ($25 - $22.80) * 5000	$11000
Net benefit in buying	$9000

Tish corp. should accept the offer by the outside supplier