QUESTION 2

Make or Buy a Component [L02}

For many years, Comstock Company has produced an electrical part that it uses in the production of diesel tractors. The company's unit product cost for the part, based on a production level of 60,000 parts per year, is as follows:

Per PartTotal

Direct materials$4.00

Direct labour2.75

Variable manufacturing overhead0.50

Fixed manufacturing overhead, traceable 3.00$180,000

Fixed manufacturing overhead, common

(allocated on the basis of labour-hours) 2.25$135,000

Unit product cost$12.50

An outside supplier has offered to supply the electrical parts to Comstock Company for only $10.00 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased.

The other two-thirds of the traceable fixed manufacturing costs consist of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.

Required:

Prepare computations showing how much profits would increase or decrease as a result of purchasing the parts from the outside supplier rather than having the company make them.