Question

2. Willy Company has been purchasing a component, Part A25 for $38.40 per unit. Willy is currently operating at 80% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part A25 is estimated as follows:

Direct materials $23.00

Direct labor 9.00

Variable factory overhead 2.24

Fixed factory overhead 6.30

Total $40.54

1. Should Willy Company buy part A25 externally or make them internally?  Prepare differential analysis to support your decision.
2. If Willy Company can rent the production facility to Terry Company for $300,000 when they purchase part A25 externally, should Willy Company buy part A25 externally or make them internally? Prepare differential analysis to support yourdecision.

Answer 1

Cast of purchase externally = $38.60 p | Cost of Production internally : D. Material : B 23:00 o lobour :$ 9.00 Variable oll! $ 2.24 Cost per unit : $ 34.24 Nore: fixed factory overhead will be occurin own of the production is not dure, Ilonce it is to be ignore in decision making. Conclusion : I since production cost is purchone cool will ro. should production loss go than for Rental Income = $300,000 loss per unit iß purcharged = (38.40 - 34.24) :94.16 No. of unit to break-even: = 3,00, 000 72,115 units 4.16 Conclusion: - If the product requirement is lost than 42, 115 unill, Willy Co. should go for purchase as it will create morence from rental income - Annie, if the requirement is more than 72,115 unita Willy Con should y for production