Homework answers / question archive / Kemp Corporation manufactures a variety of parts for use in its product

Kemp Corporation manufactures a variety of parts for use in its product

Accounting

Share With

Kemp Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 15,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $36 per unit. To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic circuits internally:

  15,000 Units

  Per Unit  per Year 

Direct materials $12  $180,000 

Direct labor  12   180,000 

Variable manufacturing overhead  4   60,000 

Fixed manufacturing overhead, traceable  6*  90,000 

Fixed manufacturing overhead, allocated 9   135,000 

Total cos t$43  $645,000 

*One-third supervisory salary; two-thirds depreciation of special equipment (no resale value).

Suppose that if the electronic circuits were purchased, the division supervisor position could be eliminated. Fixed manufacturing overhead will be allocated to other products made by the company. Also, the company could use the freed production capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, how much would be the financial advantage of buying 15,000 electronic circuits from the outside supplier?

Multiple Choice

• $80,000
• $30,000
• $105,000
• $60,000