Deer currently manufactures a subcomponent that is used in its main product. A supplier has offered to supply all the subcomponents needed at a price of $12. Deer currently produces 80,000 subcomponents at the following manufacturing costs: Per unitDirect materials $4.50Direct labor 3.00Variable manufacturing overhead 3.50Fixed manufacturing overhead 2.50Unit cost $13.50a. If Deer has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?b. If Deer has no alternative uses for the manufacturing capacity, what would be the maximum price per unit they would be willing to pay the supplier?c. Now assume Deer would avoid $120,000 in equipment leases and salaries if the subcomponent were purchased from

Question

the supplier. Now what would be the profit impact of buying from the supplier?

What will be an ideal response?

Answer 1

a. $80,000 less profit if buying outside $880,000 - $960,000
Buy: $12 × 80,000 = $960,000
Make: ($4.50 + $3.00 + $3.50) × 80,000 = $880,000
b. $11 = $880,000/80,000 units
c. $40,000 more profit if buying outside $880,000 - $840,000
Buy: $12 × 80,000 = $960,000
$960,000 - $120,000 = $840,000
Make: ($4.50 + $3.00 + $3.50) × 80,000 = $880,000

The profit impact is calculated by comparing the relevant costs of performing the activities internally to the cost of buying from an outside supplier. The maximum price the company would be willing to pay from an outside supplier would equal the relevant costs of performing the activities internally. The financial benefits of any alternative use of manufacturing capacity should be added as a relevant benefit of buying from an outside supplier.