Ahrends Company Makes 70,000 Units Per Year of a Part $\quad$

question 43

Multiple Choice

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials. $\quad$$\quad$ £17.80
Direct labour. $\quad$$\quad$ 19.00
Variable manufacturing overhead. $\quad$$\quad$ 1.00
Fixed manutacturing ov erhead. $\quad$$\quad$ 17.10
Unit product cost. $\quad$$\quad$ £54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 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 £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 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 pound advantage (disadvantage) of purchasing the part rather than making it?

• A)£273,000
• B)(£126,000)
• C)£147,000
• D)£448,000

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Definitions:

Liquidity Ratio

Financial metrics that measure a company's ability to meet its short-term obligations with its liquid assets.

Inventory Turnover

A measure of how many times a company's inventory is sold and replaced over a period, indicating the efficiency of inventory management.

Return on Assets

A profitability ratio that measures how effectively a company uses its assets to generate profit, calculated as net income divided by total assets.

Vertical Analysis

A financial analysis method that expresses each item in a financial statement as a percentage of a base amount to compare different years or companies.