Question

Golden, Inc., has been manufacturing 5,000 units of Part 10541 which is used to manufacture one of its products. At this level of production, the cost per unit of manufacturing Part 10541 is as follows:

Direct materials	$ 2
Direct labor	8
Variable overhead	4
Fixed overhead applied	6
Total	$20

A nearby supplier has offered to sell Golden 5,000 units of Part 10541 for $19 per unit. Golden has also determined that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from the supplier.

In the table below, enter the relevant costs (expressed in total dollars, not per unit) associated with making the part or buying from the supplier (show your work, but only enter your total amounts in the table):

Make Buy

Relevant Costs

B): What should Golden do? Explain.

C): Now assume that if Golden accepts the offer from the supplier, they could use the capacity currently used to manufacture Part 10541 to manufacture another product, RAC, and generate an operating profit of $4,000. What impact would this have on the decision? Be sure to defend your answer!

Answer 1

Part – A – Table for Relevant Costs

Relevant Costs	MAKE	BUY
Purchase from outside suppliers [ 5,000 x $19 ]		$95,000
Direct Materials [ 5,000 x $2 ]	$10,000
Direct Labor [ 5,000 x $8 ]	$40,000
Variable manufacturing overhead [ 5,000 x $4 ]	$20,000
Fixed manufacturing overhead [ 5,000 x ($6 x 1/3) ]	$10,000
Total Relevant Costs	$80,000	$95,000

Part – B - What should Golden do?

Golden, Inc.,should make the Part 10541, Since it gives the net advantage of $15,000 ($95,000 - $80,000) If they make the product instead of buying it from outside suppliers

Part - C

If the Golden, Inc., uses the capacity currently used to manufacture Part 10541 to manufacture another product, RAC, and generate an operating profit of $4,000. Then the net advantage will be $11,000 ( $15,000 - $4,000) . Here also they should make the Part 10541