Aholt Company Makes 40,000 Units Per Year of a Part

question 108

Multiple Choice

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 11.30 \\\hline \text { Direct Labour } & \$ 22.70 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \\\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \\\hline \text { Unit Product Cost } & \$ 59.90\\\hline \end{array}$ An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

• A) $22.70.
• B) $35.20.
• C) $38.00.
• D) $59.90.

Determine the operating income under different sales and cost scenarios.

Analyze the impact of changes in fixed and variable costs on the break-even point.

Understand and calculate the impact of sales volume changes on operating income.

Understand the factors that affect break-even points and how changes in these factors impact the break-even analysis.

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