The Management of Villanueva Industries Has Been Evaluating Whether the Company

question 109

Essay

The management of Villanueva Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A $100 cost per component was determined as follows:
Villanueva Industries uses 4,000 components per year. After Splendor, Inc., submitted a bid of $80 per component,
some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Splendor, Inc., Villanueva's unused production facilities could be leased to another company for $50,000 per year.
Required:
a. Determine the maximum amount per unit Villanueva should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
c. Assume the company could eliminate production supervisors with salaries totaling $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.

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Definitions:

Fixed Costs

Costs that do not change with the level of production or sales volume, such as rent, salaries, and insurance.

Variable Costs

Costs that vary directly with the level of production or sales volume, such as materials and direct labor.

Cost Volume Profit Graph

A graphical representation that displays the relationships between a company's costs, revenues, and profits over different levels of production and sales volumes.

CVP Graph

A visual representation of the Cost-Volume-Profit analysis, illustrating the relationships between an organization's costs, sales volume, and profit.