Carley Company produces 2.000 parts per year, which are used in the assembly of
ID: 2485022 • Letter: C
Question
Carley Company produces 2.000 parts per year, which are used in the assembly of one of its products. The variable cost of manufacturing each part is $64 and the fixed manufacturing costs total $36 per unit for a total unit product cost of $100. The part can be purchased from an outside supplier at $80 per unit. If the part is purchased from the outside supplier two-thirds of the fixed manufacturing costs can be eliminated. Which costs are relevant to this decision'? Why? What would the annual impact on the company's net operating income be as a result of buying the part from the outside supplier?Explanation / Answer
Part (a) . Evalution Alternatives ( Make Or Buy) under differential cost approach:
the relavant costs are , Variable manufacturing cost$64, Fixed manufacturing cost $24, purcase price $80.Because these are different from one alternative to another.
Decsion: Buy from supplier.
b) annual impact on Net operating income is:
20,000 units x $8 = $160,000 of net operating income increases if purchase the part.
Make Buy Differential Amount 1) Variable Manufacturing Cost/unit $64 ---- $64 2)Fixed manufacturin cost/unit $36 $12 $24 3) Purchase price from supplier ---- $80 ($80) 4) Total cos per part $100 $92 $8