Victory Electronics Makes a Part Used in the Manufacture of Desktop

question 107

Essay

Victory Electronics makes a part used in the manufacture of desktop computers.Management is
considering whether to continue manufacturing the part,or to buy the part from an outside source at a cost of $27.00 per part.Victory Electronics needs 80,000 parts per year.The cost of manufacturing 80,000 parts is computed as follows:
$\begin{array} { l r } \text { Direct materials } & \$ 750,000 \\\text { Direct labor } & 600,000 \\\text { Variable manufacturing overhead } & 525,000 \\\text { Fixed manufacturing overhead } & 650,000 \\\text { Total manufacturing costs } & \underline { \$ 2,525,0000 }\end{array}$
If Victory Electronics buys the part,it would pay $.40 per unit to transport the parts to its manufacturing plant.Purchasing the part from an outside source would enable the company to avoid 40% of fixed manufacturing overhead costs.Victory Electronics's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $65,000.
Prepare an analysis to show which alternative makes the best use of Victory Electronics's factory space:
1)Make the part.
2)Buy the part and leave facilities idle.
3)Buy the part and use facilities to make another product.

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Definitions:

Public Goods

Goods that are non-excludable and non-rivalrous, meaning that no one can be excluded from their use and one person's use does not reduce availability to others.

Private Benefit

The direct advantage or gain obtained by an individual or firm from their economic activities, without considering the impacts on third parties.

Mosquito Control

A management strategy to regulate or eliminate mosquito populations to reduce their damage to human health, economies, and enjoyment.

Marginal Benefit

The additional benefit gained from consuming or producing one extra unit of a good or service.