The Foto Company makes 10,000 units a year of a part that it uses in the products it makes. The unit cost of the product of this part is calculated as follows:

Direct materials	ps	13.00
Direct labour		20.60
Variable manufacturing overhead		2.80
Fixed manufacturing costs		10.70
unit cost of product	ps	47.10

An outside vendor has offered to sell the company all of these parts it needs for $42.10 per unit. If the company accepts this offer, the facility now 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 $36,000 per year.

If the part were purchased from an outside vendor, all direct labor cost of the part would be avoided. However, $5.40 of the fixed manufacturing overhead that is applied to the part would continue even if the part were purchased from the outside vendor. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required:

a. How much of the product's unit cost of $47.10 is relevant in the decision to make or buy the part? 

b. What is the financial advantage (disadvantage) of buying the part instead of manufacturing it?

Answer rating: 100% (QA)

a In the decision to make or buy the part only the costs that will be affected by the decision are r... View the full answer