Archer 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 $42. Archer currently produces 100,000 subcomponents at the following manufacturing costs: Per unitDirect materials $15.00Direct labor 9.00Variable manufacturing overhead 10.00Fixed manufacturing overhead 15.00Unit cost $49.00a. If Archer has no alternative uses for the manufacturing capacity, what would be the profit impact of buying the subcomponents from the supplier?b. If Archer 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 Archer would avoid $150,000 in equipment leases and salaries if the subcomponent were

Question

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

What will be an ideal response?

Answer 1

a. $800,000 less profit if buying outside $3,400,000 - $4,200,000
Buy: $42 × 100,000 = $4,200,000
Make: ($15 + $9 + $10) × 100,000 = $3,400,000
b. $34 = $3,400,000/100,000 units
c. $650,000 less profit if buying outside $3,400,000 - $4,050,000
Buy: $42 × 100,000 = $4,200,000
$4,200,000 - $150,000 = $4,050,000
Make: ($15 + $9 + $10) × 100,000 = $3,400,000

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.