Question

Bernard Company manufactures 20,000 units of part A8 each year for use on its production line. The cost per unit of A8 is as follows: Direct materials $2.40 Direct manufacturing labor 3.50 Variable manufacturing overhead 1.60 Fixed manufacturing overhead 5.00 Total cost per part $12.50 An outside supplier has offered to sell 20,000 units of part A8 each year to Bernard Company for $14.25 per part. If Bernard Company accepts this offer, the facilities now being used to manufacture part A8 could be rented to another company at an annual rental of $75,000. However, Bernard Company has determined that $3.00 of fixed manufacturing overhead allocated to part A8 would continue even if part A8 were purchased from an outside supplier. Bernard’s direct manufacturing labor consists of temporary help. Thus, Bernard can hire and dismiss those workers at will. Required: 1. Should Bernard Company accept the outside company’s offer? Why or why not? Show supporting computations.

Answer 1

Difference in Costs under both scenarios	$ 5.75	$ 1,15,000.00
The cost under the new offer scenario is less, therefore Bernard company should ACCEPT the outside company's offer.

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