Each year, Madsen Company purchases 8,000 units of a part that it needs for prod
ID: 2486138 • Letter: E
Question
Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Madsen Company that a price increase will take effect shortly, which will bring the price of the part to $25 per part. Madsen Company is considering the use of idle facilities to produce the part. The annual production costs to produce the needed 8,000 parts are as follows:
Direct materials $17,500
Direct labor 30,000
Variable indirect production costs 14,000
Fixed indirect production costs 33,500
The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production costs are avoidable.
Determine if Madsen Company should buy the part or produce it internally.
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Pall 2012 I Anatysis FINAL EXAM 1. (20 pts) Every ycar, Mothet Cumpany purehieesa produce its produet. The sopplier notihed Moer t otmpary take effect shortly, which wit bring the price ofthsprst fli Whey fiodoo has an idle facility and considers uRing n fu prodi-the cost for the needed 8,000 units will be bring the price of tb part ss V25 tu produce the part. t Direct aaterials Direct labor Indirect production costs variable Indirect production costs-fixed 14.006 33.300 anmual rem of 999 The idle facility could also be rented out at an indirect production costs are avoidable a) List the alternatives that the company h b) which of the alternatives you listed in as. es you listed in a) is best and wuY 2. (10 pts) Riverside Industries tui information is availablExplanation / Answer
If Company Produce Direct material Cost 17,500 Direct Labor Cost 30,000 Indirect production Cost 14,000 Fixed Indirect Production Cost 33,500 Total Cost 95,000 Add: Annual Rent idle facility (oppo. Cost) 99,000 Total Cost 194,000 Cost of Bought out 8000*25 200,000 Then Saving if produce 6,000 Madsen Company should internally produce Idle facility rent added because if company not internally produce then it can be rented