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Wehner Company is currently manufacturing Part ABS-43, producing 55,000 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows: Of the total fixed overhead assigned to ABS-43, $15,400 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $58. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred. Required: 1. Should Wehner Company make or buy Part ABS-43? 2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 17, Problem 9E
Textbook Problem
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Wehner Company is currently manufacturing Part ABS-43, producing 55,000 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Chapter 17, Problem 9E, Wehner Company is currently manufacturing Part ABS-43, producing 55,000 units annually. The part is

Of the total fixed overhead assigned to ABS-43, $15,400 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $58. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

Required:

  1. 1. Should Wehner Company make or buy Part ABS-43?
  2. 2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier?

1.

To determine

Describe whether the company should make or buy the Part ABS-43.

Explanation of Solution

Tactical decision making: Tactical decision making is a process in which the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compared with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.

Describe whether the company should make or buy the Part ABS-43 as follows:

ParticularsMaking decisionBuy decision
Direct materials (1)$ 2,508,000$0
Direct labor (2)$ 539,000$0
Variable overhead (3)$ 151,250$0
Fixed overhead$15,400$0
Purchase price (4)$0$3,190,000
       Totals$3,213,650$3,190,000

Table (1)

In this case, company should not make the Part ABS-43, because making decision has incurred more expense than buying decision. Hence, the company should purchase the part from the outside supplier.

Working note (1):

Calculate the direct material of Company W.

Direct materials = (Direct mateiral per unit×Number of units)=($45.60×55,000)=$2,508,000

Working note (2):

Calculate the direct labor of Company W

2.

To determine

Ascertain the maximum amount per unit that the company is willing to pay to an outside supplier.

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Chapter 17 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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