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The Park Avenue Corporation currently makes a part required in its finished product. The company uses 2,116 units of this part annually. Park Avenue Corp has been approached by a vendor to provide this part for $13.04 each. The following cost information is provided
Direct Materials per unit $6.34
Direct Labor per unit $7.30
Variable Factory Overhead per unit $2.50
Fixed Factory Overhead per unit $7.50
How much would Park Avenue Corporation save by having the vendor make the part, instead of making it themselves?

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Answer:

If the company buys the part, it will save $6,559.6

Explanation:

Giving the following information:

Purchase price= $13.04

The company uses 2,116 units of this part annually.

Production:

Direct Materials per unit $6.34

Direct Labor per unit $7.30

Variable Factory Overhead per unit $2.50

We weren't provided with information regarding the fixed costs. I will assume that non of the fixed overhead costs are avoidable, therefore, they are irrelevant to the decision making process.

Buy:

Total cost= 2,116*13.04= $27,592.64

Production:

Total cost= 2,116*(6.34 + 7.3 + 2.5)= $34,152.24

If the company buys the part, it will save $6,559.6

In the case when the company buys the part, it will save $6,559.6.

Calculation of the value of part:

Since

Purchase price= $13.04

Direct Materials per unit $6.34

Direct Labor per unit $7.30

Variable Factory Overhead per unit $2.50

Now

For Buy:

Total cost= 2,116*13.04= $27,592.64

For Production:

Total cost= 2,116*(6.34 + 7.3 + 2.5)= $34,152.24

So, we can say that In the case when the company buys the part, it will save $6,559.6.

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