McAdd Industries Is Considering Whether to Continue Making Part MPG

question 72

Essay

McAdd Industries is considering whether to continue making part MPG 411 or buying the part from a supplier. The supplier can sell the needed number of parts (47,000 projected)to McAdd for an amount that is above the company's current cost to manufacture it. If McAdd decides to purchase the parts from its supplier, it will be able to reconfigure the manufacturing floor in order to allow increased production of 50 of its product for an increased contribution margin of $17,000 for the year. The old machine has a book value of $39,000, and can be sold for $4,000.
Discuss this situation. What are the considerations?

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Definitions:

Overhead Absorption Rate

The rate at which indirect costs are allocated to produced goods or services.

ABC System

Activity-Based Costing; a method of assigning overhead and indirect costs to specific products or projects, based on their usage of activities.

Single-Base Allocation

A cost allocation method where overhead costs are distributed based on a single criterion or cost driver.

Cost Difference

The variance between the actual cost and the standard or expected cost of an item or activity.