Question

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Moon Appliance has no alternative use for its manufacturing facilities. Nadal Parts Company has offered to sell 9,000 units of Part B89 to Moon Appliance for $20.00 per unit. What should Moon Appliance do

Answer 1

Answer:

The correct option is a. Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

Moon Appliance manufactures a variety of appliances which all use Part B89. Currently, Moon Appliance manufactures Part B89 itself. It has been producing 9,000 units of Part B89 annually. The annual costs of producing Part B89 at the level of 9,000 units include:

Direct materials = $3.00

Direct labor = $8.00

Variable manufacturing overhead = $4.00

Fixed manufacturing overhead = $3.00

Total cost = $18.00

All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assume Moon Appliance can purchase 9,000 units of the part from the Nadal Parts Company for $20.00 each, and the facilities currently used to make the part could be used to manufacture 7,000 units of another product that would have a $6 per unit contribution margin. If no additional fixed costs would be incurred, what should Moon Appliance do?

Select one:

a. Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit.

b. Make the new product and buy the part to earn an extra $4.00 per unit contribution to profit.

c. Continue to make the part to earn an extra $3.00 per unit contribution to profit.

d. Continue to make the part to earn an extra $8.00 per unit contribution to profit.

The explanation of the answer is now given as follows:

Since all of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier, it implies that the fixed manufacturing overhead costs will not be considered in taking the decision.

We therefore proceed as follows:

Amount saved and generated per unit by outsourcing = Direct materials cost per unit + Direct labor cost per unit + Variable manufacturing overhead per unit + Per unit contribution margin from another product = $3 + $8 + $4 + $6 = $21

Price to buy from Supplier = $20

Extra per unit contribution to profit = Amount saved and generated per unit by outsourcing – Price to buy from Supplier = $21 - $20 = $1

Therefore, the correct option is a. Make the new product and buy the part to earn an extra $1.00 per unit contribution to profit.