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Homework answers / question archive / Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures

Accounting

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct Materials$11.30Direct Labour$22.70Variable Manufacturing Overhead$1.20Fixed Manufacturing Overhead$24.70Unit Product Cost$59.90An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 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 $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

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