Ahrends Company makes 70,000 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.$\quad$$\quad$£17.80
Direct labour.$\quad$$\quad$19.00
Variable manufacturing overhead.$\quad$$\quad$1.00
Fixed manutacturing ov erhead.$\quad$$\quad$17.10
Unit product cost.$\quad$$\quad$£54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 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 £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 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 pound advantage (disadvantage) of purchasing the part rather than making it?

A)£273,000
B)(£126,000)
C)£147,000
D)£448,000

Question

Ahrends Company makes 70,000 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.$\quad$$\quad$£17.80
Direct labour.$\quad$$\quad$19.00
Variable manufacturing overhead.$\quad$$\quad$1.00
Fixed manutacturing ov erhead.$\quad$$\quad$17.10
Unit product cost.$\quad$$\quad$£54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 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 £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 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 pound advantage (disadvantage) of purchasing the part rather than making it?

A)£273,000
B)(£126,000)
C)£147,000
D)£448,000

Quizplus · Accepted Answer

The net total pound advantage of purchasing the part rather than making it is calculated by considering the savings on direct materials, direct labor, variable manufacturing overhead, and the avoidable part of fixed manufacturing overhead, then subtracting the cost of purchasing the parts and adding the additional contribution margin from using the facilities for a high-demand product.1. Savings from not producing the part:   - Direct materials: £17.80   - Direct labor: £19.00   - Variable manufacturing overhead: £1.00   - Avoidable fixed manufacturing overhead: (£17.10 - £8.20) = £8.90   Total savings per unit = £17.80 + £19.00 + £1.00 + £8.90 = £46.702. Cost of purchasing the part: £48.503. Net cost per unit by purchasing: £48.50 - £46.70 = £1.80 additional cost per unit4. Total additional cost for purchasing 70,000 units: 70,000 * £1.80 = £126,0005. Additional contribution margin from using the facilities for a high-demand product: £273,0006. Net total pound advantage: £273,000 - £126,000 = £147,000

Ahrends Company Makes 70,000 Units Per Year of a Part \quad

Ahrends Company Makes 70,000 Units Per Year of a Part $\quad$