Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials	$	17.80
Direct labor		19.00
Variable manufacturing overhead		1.00
Fixed manufacturing overhead		17.10
Unit product cost	$	54.90

An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

What is the financial advantage (disadvantage) of purchasing the part rather than making it? (Round your intermediate calculations to 2 decimal places.)

Garrison 16e Rechecks 2017-09-13

Multiple Choice

• $273,000
• ($126,000)
• $147,000

  Correct
• $448,000

Explanation

Relevant cost to make: 

Direct materials	$	17.80
Direct labor		19.00
Variable manufacturing overhead		1.00
Avoidable fixed manufacturing overhead ($17.10 – $8.20)		8.90
Total relevant cost to make	$	46.70

Analysis of purchasing rather than making:
Cost savings ($46.70 per unit × 70,000 units)	$	3,269,000
Cost to purchase ($48.50 per unit × 70,000 units)		(3,395,000	)
Additional contribution margin from alternative use of facilities		273,000
Net advantage of purchasing	$	147,000