Question
In: Accounting
Kirkland Company manufactures a part for use in its production. When 10,000 units are produced, the...
Kirkland Company manufactures a part for use in its production. When 10,000 units are produced, the costs per unit are:
Direct materials $1.20
Direct manufacturing labor 6.00
Variable manufacturing support 2.40
Fixed manufacturing support 3.20
Total $12.80
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $13.00 per unit. The plant facilities could be used to manufacture another item at a savings of $20,000 if Kirkland accepts the offer. In addition, $2.00 per unit of fixed manufacturing support on the original item would be eliminated.
a) Should Kirkland Company buys parts from Mike Company? Explain your answer.
b) What amount of savings from the plant facilities makes buying and outsourcing options equal.
Solutions
Expert Solution
| 1 | Kirkland Company should buys parts from Mike Company | |||
| As the cost to buy is less than the cost to make the part. | ||||
| 2 | $14,000 | |||
| (20,000 - 6,000) | ||||
| Working | ||||
| Make | Buy | Effect of Buying | ||
| Direct materials | 12,000 | - | 12,000 | |
| Direct labor | 60,000 | - | 60,000 | |
| Variable manufacturing support | 24,000 | - | 24,000 | |
| Fixed manufacturing support | - | (20,000) | 20,000 | |
| Purchase price | - | 130,000 | (130,000) | |
| Savings in space | - | (20,000) | 20,000 | |
| Total annual cost | 96,000 | 90,000 | 6,000 | |
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