A company currently makes a product (Product A) that requires part #445. The following costs are...

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A company currently makes a product (Product A) that requires part #445. The following costs are required to meet the annual need of 100,000 units of part #445 which is produced in 200 batches: Direct materials $ 50 Direct labor 30 Total manufacturing overhead 20 Total unit cost $100 A supplier has offered to supply the needed part #445 for $17.00 each. If the company accepts the supplier's offer, its direct material costs will decrease by 10%, its direct labor costs will decrease by 25%, and its unit-related overhead will decrease by 30%. In addition, if component # 445 is not produced internally, the number of batches required will be reduced by 25%. An analysis of the total manufacturing overhead reveals that unit-related overhead is $10 per unit, batch-related overhead is $1,000 per batch, and facility-sustaining overhead is $800,000. There is no product-sustaining overhead. 1. Should the company accept the supplier's offer? 2. Assume that if the company accepts the offer, it can use the released space to increase the production of the different product. This increased production will increase profits by $200,000. Should the company accept the supplier's offer? 3. Discuss additional factors the company should consider before deciding whether to continue making part #445 this offer or not. A company currently makes a product (Product A) that requires part #445. The following costs are required to meet the annual need of 100,000 units of part #445 which is produced in 200 batches: Direct materials $ 50 Direct labor 30 Total manufacturing overhead 20 Total unit cost $100 A supplier has offered to supply the needed part #445 for $17.00 each. If the company accepts the supplier's offer, its direct material costs will decrease by 10%, its direct labor costs will decrease by 25%, and its unit-related overhead will decrease by 30%. In addition, if component # 445 is not produced internally, the number of batches required will be reduced by 25%. An analysis of the total manufacturing overhead reveals that unit-related overhead is $10 per unit, batch-related overhead is $1,000 per batch, and facility-sustaining overhead is $800,000. There is no product-sustaining overhead. 1. Should the company accept the supplier's offer? 2. Assume that if the company accepts the offer, it can use the released space to increase the production of the different product. This increased production will increase profits by $200,000. Should the company accept the supplier's offer? 3. Discuss additional factors the company should consider before deciding whether to continue making part #445 this offer or not.

Answer rating: 100% (QA)

Solution 1 Since the company will incur 100000 less in making it in house Company should reject the offer Working Note Wherever the Company incurs les... View the full answer