ABC Company makes 40,000 units per year of a part it uses in the products it man
ID: 2560270 • Letter: A
Question
ABC Company makes 40,000 units per year of a part it uses in the products it manufactures. The per unit product cost of this part is shown below: direct materials .............. $15.30 direct labor .................. 27.40 variable overhead ............. 16.10 allocated fixed overhead ...... 10.70 total ......................... $69.50 An outside supplier has offered to sell ABC Company 40,000 units of this part a year for $60.70 per unit. If ABC Company accepts this offer, the facilities now being used to make this part could be used to make more units of a product that is in high demand. The additional contribution margin that could be earned on this other product would be $100,000 per year. Calculate the increase in company profits if ABC Company accepts the outside suppliers offer. Do not use decimals or type the word increase after your answer.
Explanation / Answer
Per unit Total Make Buy Make Buy Direct materials 15.3 612000 Direct labor 27.4 1096000 Variable overhead 16.1 644000 Purchase cost 60.7 2428000 Opportunity cost 100000 Total cost 2452000 2428000 Increase in company profits = 24000(2452000-2428000)