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:

$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 11.30 \
\hline \text { Direct Labour } & \$ 22.70 \
\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \
\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \
\hline \text { Unit Product Cost } & \$ 59.90\
\hline
\end{array}$An 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.

-What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?
A) ($64,000).
B) $264,000.
C) ($328,000).
D) ($548,000).

Question

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:

$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 11.30 \
\hline \text { Direct Labour } & \$ 22.70 \
\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \
\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \
\hline \text { Unit Product Cost } & \$ 59.90\
\hline 
\end{array}$An 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.

-What is the net total dollar advantage (disadvantage)of purchasing the part rather than making it?
A) ($64,000).
B) $264,000.
C) ($328,000).
D) ($548,000).

Quizplus · Accepted Answer

The net total dollar advantage of purchasing the part rather than making it is $64,000. This is calculated as follows:Cost of making the part:Direct materials: $11.30 per unit x 40,000 units = $452,000Direct labor: $22.70 per unit x 40,000 units = $908,000Variable manufacturing overhead: $1.20 per unit x 40,000 units = $48,000Fixed manufacturing overhead: $24.70 per unit x 40,000 units = $988,000Total cost of making the part: $2,396,000Cost of purchasing the part:$46.20 per unit x 40,000 units = $1,848,000Savings from purchasing the part:$2,396,000 - $1,848,000 = $548,000Additional contribution margin from making the other product:$264,000Net total dollar advantage:$548,000 + $264,000 = $64,000

Aholt Company Makes 40,000 Units Per Year of a Part