CMA Study Group

247.

Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned production levels.

If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than

a. $12.00.

b. $12.50.

c. $13.00.

d. $14.00.

Correct answer is D

But I have Computed $13

How $14 is computed and Why?

Thanks and Regards

Shariq Ghaznavi

In make vs buy decision the most important thing to consider is relevent cost. In this problem the relevent cost is the per unit variable cost and avoidable fixed cost.

Per unit variable cost is $11 as mentioned in the problem

Per unit avoidable fixed cost is 150,000 x ((1- 0.4) = 0.6) = 90,000 / 30,000 = $3 (the level of production is 30,000 as mentioned in the problem, ignore the 60,000 theoratical capacity). $90,000 is the avoidable fixed cost if part is purchased from outside

It is mentioned in the question that 40% fixed costs are incurrable no matter what the decision will be, therefore the remaining 60% fixed cost is avoidable if Aril Industries decides to purchase the part 730.

Now to realize a net profit the cost of the part should be less than 11 + 3 = $14 (which is the correct answer) 

Hope it is clear for you now.

Best regards,

Maqsood A. Qureshi CMA, CDIF, MBA