ABC Company makes 40,000 units per year of a part it uses in the products it man
ID: 2585251 • 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
Fixed cost is irrelevant as it will continue to occur in both scenarios
Make Amt Buy Amt Direct Material 15.30 Cost of Purchase 60.70 Direct Labor 27.40 Variable Overhead 16.10 Total Cost 58.80 60.70 Particulars Amt Loss from purchase (60.70 - 58.80) x 40000 -76000 Contribution from other product 100000 Increase in Income 24000