Digital Devices manufactures cell phones that sell for $125 each. The company wa
ID: 2529615 • Letter: D
Question
Digital Devices manufactures cell phones that sell for $125 each. The company wants to reduce manufacturing costs and one option is to buy a part needed to manufacture the cell phones from a supplier in Boise, Idaho for $8.00 per part. Digital Devices needs 100,000 parts per year for all of its models. The costs of producing the part internally is provided below:
Per Unit Total (100,000 Units)
Raw Materials $.35 $35,000
Direct Labor $3.25 $325,000
Variable Mfg Overhead $.65 $65,000
Fixed Manufacturing OH $200,000
If the part is purchased from the supplier 40 percent of the fixed manufacturing overhead costs will be eliminated and factory space can be rented out for $80,000 per year. Determine if the company should make or buy the part and answer questions 16 through 19.
16. What are the relevant costs to make the parts internally: a. $524,000 b. $568,000 c. $625,000 d. None of the above
17. What are the relevant costs to buy the parts: a. $840,000 b. $919,000 c. $721,000 d. None of the above
18. What does it cost per part to buy the parts from the supplier: a. $4.65 b. $6.45 c. $7.25 d. None of the above
19. How much cheaper is it to make the 100,000 parts than to buy them: a. $285,000 b. $215,000 c. $185,000 d. $160,000
Explanation / Answer
Relevant cost to make internally
1-
raw material
35000
direct labor
325000
variable manufacturing overhead
65000
Fixed overhead
200000
relevant cost to make
625000
2-
relevant cost to buy
purchase cost
100000*8
800000
unavoidable fixed manufacturing overhead =200000*60%
200000*60%
120000
less rent from factory space
-80000
relevant cost to buy
840000
3-
cost per part to buy the parts from the supplier
840000/100000
8.4
4-
How much cheaper is it to make the 100,000 parts than to buy them
840000-625000
215000
Relevant cost to make internally
1-
raw material
35000
direct labor
325000
variable manufacturing overhead
65000
Fixed overhead
200000
relevant cost to make
625000
2-
relevant cost to buy
purchase cost
100000*8
800000
unavoidable fixed manufacturing overhead =200000*60%
200000*60%
120000
less rent from factory space
-80000
relevant cost to buy
840000
3-
cost per part to buy the parts from the supplier
840000/100000
8.4
4-
How much cheaper is it to make the 100,000 parts than to buy them
840000-625000
215000