Question

1. HAV, Inc. manufactures digital cameras. Hawkins is considering whether it should outsource production of a part used in the manufacturing of its cameras. A supplier has been identified who can sell the part to HAV at a price of $6.90 per unit.

Currently, 60,000 units of the part were made last year. At this production level, the company incurred $354,000 of total variable direct product costs. Manufacturing overhead increased by $0.10 for each unit produced. Fixed manufacturing overhead costs equaled $50,000.

If the part were purchased from the outside supplier, 75% of the total fixed manufacturing overhead cost would continue, and 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 income from this other product would be $22,000 per year.

Assuming the company will need 50,000 units of the part next year, at what purchase price per unit will HAV be economically indifferent between making and buying the part from the outside supplier? (circle your final answer)

Answer 1

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Relevant cost:
		Per unit	Total
Variable Manufacturing overhead	($354,000/60,000)+$0.10	$      6.00	$ 300,000
Fixed Manufacturing overhead	$50,000*25%		$   12,500
Opportunity cost-Lost income			$ -22,000
Net Relevant Cost		a	$ 290,500
No of units needed		b	50,000
Per unit cost		a/b	$       5.81
Unit will be indifferent at purchase price of $5.81