Foster Company Makes 20, 000 Units Per Year of a Part

question 140

Essay

Foster Company makes 20, 000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $51.80 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 $44, 000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $5.10 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.
Required:
a.How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
b.What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?
c.What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20, 000 units required each year?

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Definitions:

Recency Effect

A psychological phenomenon where the most recently presented items or experiences are more likely to be remembered than those presented earlier.

Rote Rehearsal

A memorization technique based on repetition, where information is repeated over and over to keep it in short-term memory for longer periods.

Permanent Memory

A long-term storage of information in the brain, considered to be relatively stable and enduring over time.

Impressive Feats

Remarkable acts or achievements that demonstrate a high level of skill, strength, or ingenuity.