Problem 6 (10 Points) The Freemont Company uses 2,500 units of Part 501 each yea
ID: 2525315 • Letter: P
Question
Problem 6 (10 Points)
The Freemont Company uses 2,500 units of Part 501 each year. The full manufacturing cost of one unit of Part 501 at this volume is:
Direct materials
$ 4.00
Direct labor
3.00
Variable manufacturing overhead
2.00
Average fixed manufacturing overhead
2.00
Total
$11.00
An outside supplier has offered to sell Freemont unlimited quantities of Part 501 at a unit cost of $10.00. If Freemont accepts this offer, it can eliminate 60 percent of the fixed costs assigned to Part 501. Furthermore, the space devoted to the manufacture of Part 501 can be rented to another company for $5,000 per year.
Determine in dollars, the increase or decrease of annual profits from Freemont accepting the offer of the outside supplier.
Direct materials
$ 4.00
Direct labor
3.00
Variable manufacturing overhead
2.00
Average fixed manufacturing overhead
2.00
Total
$11.00
Explanation / Answer
Acceptance of offer from outside supplier $ Extra buying cost ($ 10/unit for 2500 units) -25000 Saving of direct materials ($ 4/unit for 2500 units) 10000 Saving of direct labour ($ 3/unit for 2500 units) 7500 Saving of variable overhead ($ 2/unit for 2500 units) 5000 Saving of fixed overhead(60% of $ 2/unit for 2500 units) 3000 (60% of fixed manufacturing overhead) Net Benefit 500 Benifit of $ 500 from accepting the offer