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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