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.

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Definitions:

Moro Province

A geographic and administrative region in the Philippines, historically significant for its resistance against Spanish, American, and Japanese colonial rule.

American Rule

A legal principle that each party involved in a lawsuit covers their own attorney's fees, unless specific legislation or a contract states otherwise.

Resistance

Opposition or defiance against an authority or any controlling force.

Spanish-American-Cuban-Filipino War

Also known as the Spanish-American War (1898), this conflict involved the United States supporting Cuban and Filipino rebels against Spanish colonial rule, resulting in the U.S. acquiring territories like Guam, Puerto Rico, and the Philippines.