Problem - David Company requires three units of D11 for every unit of B7 that it produces. Currently D11 is produced in-house by Marcus. Unit costs for D11 are given below and are based on a budget of 5000 units of 11 production per month.
Direct materials $ 3.25
Direct labor $ 2.25
Manufacturing overhead $ 2.60
Total $ 8.10
Variable mfg. overhead per unit amounts to $ 1.00
Fixed mfg. overhead accounts for the remaining $ 1.60 of overhead costs.
In its annual budget for next year David has included provisions for the manufacture of 60,000 units of D11.
Lander Corporation has made an offer to sell David the required units of D11 for $7.50 each. Answer the following related questions.
Part A: What are the annual estimated fixed mfg. overhead costs of D11 production? A total number is required.
Part B: If all of the fixed mfg. OH costs are sunk, what is the net (cost) benefit of making the units of D11 in-house?
A negative number indicates that it is more costly to purchase from Lander than to make the units in-house. Compare annual costs.
Part C: What is the net (cost) benefit of making the units of D11 in house, if 40% of the fixed costs can be saved by outsourcing the production?
Part D: What is the net (cost) benefit of purchasing the units of D11 from Lander, if machinery used in D11 production can be redeployed to another product saving David $65,000 per year and the demand for D11's increases to 75,000 units? Treat this question independently of Part C.