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Problem 4 (4 marks) (8 minutes) Yaver, Inc
Problem 4 (4 marks) (8 minutes) Yaver, Inc., has been manufacturing 5,000 units per month of part 10541, which is used in the manufacture of one of its products. At this level of production, the cost per unit of manufacturing part 10541 is as follows: Direct materials $3 Direct labour 11 Variable overhead 4 Fixed overhead applied 6 $24. Brown Company has offered to sell Yaver 5,000 units of part 10541 for $22 a unit. Yaver has determined that it could use the facilities presently used to manufacture part 10541 to manufacture product RAC, which would generate an additional contribution margin per month of $15,000. Yaver has also determined that one third of the fixed overhead applied will be saved if part 10541 is purchased from Brown and product RAC is made. Calculate the cost to buy and the cost to make and the net advantage/disadvantage of buying the part externally.
Expert Solution
| Cost of Manufacturing | |
| Particulars | Amount |
| Cost of Manufacturing per unit(A) | 24 |
| No of units Required(B) | 5,000 |
| Total Cost(A*B=C) | 120,000 |
| Cost of Buying(Net of Savings/Benefits ) | |
| Particulars | Amount |
| Price per Unit(1) | 22 |
| No of units Required(2) | 5,000 |
| Total Cost of Buying(1*2=3) | 110,000 |
| Additional Savings/(Costs) from Buying | |
| Additional Contribution | 15,000 |
| Fixed Cost to be continued(5000*6*2/3) | (20,000) |
| Total Savings(4) | (5,000) |
| Net Cost of Buying(3-4=5) | 115,000 |
| Net Advantage from Buying the product | |
| Particulars | Amount |
| Cost of Manufacturing | 120,000 |
| Cost of Procuring | 115,000 |
| Net Savings | 5,000 |
Please note that we can also present the same in one another way by considering the true cost of manufacturing i.e without considering Allocated fixedcost then cost of manufacturing will be 100000(120000-((5000*6)*2/3)).
In Such a case Net cost of Buying will be 95000(110000-15000)
Benefit will be the same.
Please let me know for any clarification.
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