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Homework answers / question archive / Problem 4 (4 marks) (8 minutes) Yaver, Inc

Problem 4 (4 marks) (8 minutes) Yaver, Inc

Accounting

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.

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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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