Question

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.

Answer 1

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