Leland Manufacturing uses 10 units of part KJ37 each month in the production of radar equipment. The accountant says that Leland's cost for manufacturing each unit of KJ37 is as presented below.
Direct materials ................$1,000
Direct labor ..................$8,000
Materials handling (20% of direct material cost) ...$200
Other manufacturing overhead ..........$12,000
Total manufacturing cost ...........$21,200
Materials handling represents the direct variable costs of the receiving department and is applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two-third fixed. Scott Supply, one of the Leland's reliable vendors, has offered to supply part KJ37 at a unit price of $15,000.
The fixed cost of producing KJ137 is the cost of a special piece of testing equipment that ensures the quality of each part manufactured. This testing equipment is under a long-term, no cancel able lease. If Leland were to purchase part KJ37, materials handling costs would not be incurred
Required:
a. If Leland purchases the KJ37 units from Scott, the capacity Leland was using to manufacture these parts would be idle. Should Leland purchase the parts from Scott? Make explicit and key assumptions
b. Assume Leland manufacturing is able to rent all idle capacity for $25,000 per month. Should Leland purchase from Scott Supply? Make explicit any key assumptions.
c. Assume that Leland Manufacturing does not wish to commit to a rental agreement but could use idle capacity to manufacture another product that would contribute, that would contribute $52,000 per month. Should Leland manufacture KJ37? Make explicit any key assumptions.