Question

In: Accounting

Diehl Corporation manufactures a variety of parts for use in its product. The company has always...

Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 22,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $35 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic circuits internally: Per Unit 22,000 Units per Year Direct materials $ 15 $ 330,000 Direct labor 8 176,000 Variable manufacturing overhead 3 66,000 Fixed manufacturing overhead, traceable 3 * 66,000 Fixed manufacturing overhead, allocated 6 132,000 Total cost $ 35 $ 770,000 *One-third supervisory salary; two-thirds depreciation of special equipment (no resale value). Suppose that if the electronic circuits were purchased, the division supervisor position could be eliminated. Fixed manufacturing overhead will be allocated to other products made by the company. Also, the company could use the freed production capacity to launch a new product. The segment margin of the new product would be $220,000 per year. Given this new assumption, how much would be the financial advantage of buying 22,000 electronic circuits from the outside supplier?

Solutions

Expert Solution

Solution

Diehl Corporation

Determination of the financial advantage of buying 16,000 electronic circuits from the outside supplier:

The correct option is $112,000

Computations:

Per Unit Cost to Buy = $35

Per Unit Cost to Make -

Direct materials           $15

Direct labor                 $8

Variable MOH                        $3

Traceable Fixed MOH            $1        ($3 x 1/3 = $1)

Opportunity cost         $10

Total per unit cost       $37

Cost to Make $37 is higher than cost to Buy $35 by $2.

Hence, the financial advantage of buying 22,000 electronic circuits from outside supplier = $2 x 22,000 = $44,000

Notes:

1. The one third supervisory salary of traceable fixed manufacturing overhead ($3 x 1/3) is avoided if the company opts to buy the electronic circuit from outside supplier. Hence, $1 is relevant cost.

2. Also, the opportunity cost relates to the segment margin lost if the company opts to Make the circuit instead of not using the freed production capacity to launch a new product. The segment margin lost (opportunity cost) per unit = $220,000/22,000 units = $10


Related Solutions

Diehl Corporation manufactures a variety of parts for use in its product. The company has always...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 12,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $30 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 16,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $35 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 23,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $37 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always...
Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 20,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $36 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic...
Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors.
Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:Per Unit15,400 UnitsPer YearDirect materials$9$138,600Direct labor11169,400Variable...
Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a...
Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labour-hours. On December 10, 2015, the company’s controller made a preliminary estimate of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $3,402,000 and the estimated 63,000 total direct labour-hours for 2016: Predetermined overhead rate = 3,402,000/63,000 = $54 per direct labour...
Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a...
Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labor-hours. On December 10, 2015, the company's controller made a preliminary estimate of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $3,402,000 and the estimated 63,000 total direct labor-hours for 2016:             Predetermined overhead rate = $2,475,000/52,000 hours                                                            =...
Gibson Fabricators Corporation Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry. The...
Gibson Fabricators Corporation Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labour-hours. On the December 10, 2019, the company’s controller made a preliminary estimate of the predetermined overhead rate for 2020. The new rate was based on the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labourhours for 2020: Predetermined overhead rate = $2,475,000/ 52,000...
Case 4-27. Sharpton fabricators corporation manufactures a variety of parts for the automative industry. th company...
Case 4-27. Sharpton fabricators corporation manufactures a variety of parts for the automative industry. th company uses a jo order costing system with a plantwide predetermined overhead rate based on direct hours. On December 10, 2015, the company's controller made a preliminary estimates of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labor - hours for 2016. Pretermined overhead rate = $2,475,000/...
Case 4-27. Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. th company...
Case 4-27. Sharpton Fabricators Corporation manufactures a variety of parts for the automotive industry. th company uses a job order costing system with a plant wide predetermined overhead rate based on direct hours. On December 10, 2015, the company's controller made preliminary estimates of the predetermined overhead rate for 2016. The new rate was based on the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labor - hours for 2016. Predetermined overhead rate = $2,475,000/...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT