Zapple Ltd. is producing and distributing a new solar light system that it sells for $125. It uses 500 units of a specific part to manufacture the solar light system. The unit costs that are incurred to manufacture the light system are as shown below: Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs which could be eliminated if the production is outsource. The remainder of the overhead costs are comprised of 50% variable costs and 50% fixed costs, which cannot be avoided if the production is outsourced. An outside supplier has offered to supply the part at a price of $77 per unit.
a. Should Zapple purchase the component from the outside vendor?
b. Should Zapple purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

Question

Zapple Ltd. is producing and distributing a new solar light system that it sells for $125. It uses 500 units of a specific part to manufacture the solar light system. The unit costs that are incurred to manufacture the light system are as shown below:  Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs which could be eliminated if the production is outsource. The remainder of the overhead costs are comprised of 50% variable costs and 50% fixed costs, which cannot be avoided if the production is outsourced. An outside supplier has offered to supply the part at a price of $77 per unit. 
a. Should Zapple purchase the component from the outside vendor?
b. Should Zapple purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

Quizplus · Accepted Answer

The Answer of Zapple Ltd. is producing and distributing a new solar light system that it sells for $125. It uses 500 units of a specific part to manufacture the solar light system. The unit costs that are incurred to manufacture the light system are as shown below:  Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs which could be eliminated if the production is outsource. The remainder of the overhead costs are comprised of 50% variable costs and 50% fixed costs, which cannot be avoided if the production is outsourced. An outside supplier has offered to supply the part at a price of $77 per unit. 
a. Should Zapple purchase the component from the outside vendor?
b. Should Zapple purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.