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Mesily Company makes 20,000 units per year of a part it uses in the products it manufactures

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Mesily Company makes 20,000 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 materials

$25.10

Direct labour

18.20

Variable manufacturing overhead

2.40

Fixed manufacturing overhead

13.40

Unit product cost

$59.10

 

An outside supplier has offered to sell the company all these parts it needs for $56.00 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 a product that is in high demand. The additional contribution margin on this other product would be $50,000 per year.

 

If the part were purchased from the outside supplier, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue. This fixed manufacturing overhead cost would be applied to the company's remaining products.

 

Required:

a. How much of the unit product cost of $59.10 is relevant in the decision of whether to make or buy the part?

b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?