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

question 104

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.

-What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

• A) ($64,000).
• B) $264,000.
• C) ($328,000).
• D) ($548,000).

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Definitions:

Socially Optimal Quantity

The level of output or production that maximizes societal welfare, taking into account all external costs and benefits.

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in a stable market condition.

Pollution

The release of harmful substances or products into the environment as a result of human activity.

Marketplace

A physical or digital location where goods and services are exchanged between buyers and sellers.