Rutro Corp. makes 59,000 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 material $21.00 Direct labor 23.00 Variable manufacturing overhead 8.00 Fixed manufacturing overhead 30.00 Unit product cost $82.00 An outside supplier has offered to sell the company all of the 59,000 parts it needs for $75.00 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 another product that is in high demand. The additional contribution margin on this other product would be $310,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, 64% 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. How much of the unit product cost of $82.00 is relevant in the decision of whether to make or buy the part? What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? Should Rutro continue to manufacture the part or buy it? What effect do fixed costs have in determining whether to continue manufacturing the part or buy it? What would have to happen to fixed costs for your answer to change on the issue of continuing to manufacture the part or buy it?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter5: Process Costing

Section: Chapter Questions

Problem 1PA: The following product Costs are available for Haworth Company on the production of chairs: direct...

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Rutro Corp. makes 59,000 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 material $21.00

Direct labor 23.00

Variable manufacturing overhead 8.00

Fixed manufacturing overhead 30.00
Unit product cost $82.00

An outside supplier has offered to sell the company all of the 59,000 parts it needs for $75.00 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 another product that is in high demand. The additional contribution margin on this other product would be $310,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, 64% 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.