Sharp Image Company makes a part used in the manufacture of video cameras. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $21.30 per part. Sharp Image needs 100,000 parts per year. The cost of manufacturing 100,000 parts is computed as follows:
|
Direct materials
|
$ 765,000
|
|
Direct labor
|
612,000
|
|
Variable manufacturing overhead
|
510,000
|
|
Fixed manufacturing overhead
|
663,000
|
|
Total manufacturing costs
|
$2,550,000
|
|
|
|
If Sharp Image buys the part, it would pay $.30 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 35% of fixed manufacturing overhead costs. Sharp Image's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $75,000.
Prepare an analysis to show which alternative makes the best use of Sharp Image's factory space:
1) make the part
2) buy the part and leave facilities idle
3) buy the part and use facilities to make another product
Answer:
|
|
Make the Part
|
Buy part and leave facilities idle
|
Buy part and use facilities to make another product
|
|
Direct materials
|
|
|
|
|
Direct labor
|
|
|
|
|
Variable manufacturing overhead
|
|
|
|
|
Variable transportation
|
|
|
|
|
Fixed manufacturing overhead
|
|
|
|
|
Purchase price
|
|
|
|
|
Profit contribution from another product
|
|
|
|
|
Total cost
|
|
|
|