Victory Electronics makes a part used in the manufacture of desktop computers. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $27.00 per part. Victory Electronics needs 80,000 parts per year. The cost of manufacturing 80,000 parts is computed as follows:

If Victory Electronics buys the part, it would pay $.40 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 40% of fixed manufacturing overhead costs. Victory Electronics' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $65,000.
Prepare an analysis to show which alternative makes the best use of Victory Electronics' factory space:
1. Make the part.
2. Buy the part and leave facilities idle.
3. Buy the part and use facilities to make another product.

Question

Victory Electronics makes a part used in the manufacture of desktop computers. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $27.00 per part. Victory Electronics needs 80,000 parts per year. The cost of manufacturing 80,000 parts is computed as follows:
  
If Victory Electronics buys the part, it would pay $.40 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 40% of fixed manufacturing overhead costs. Victory Electronics' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $65,000.
Prepare an analysis to show which alternative makes the best use of Victory Electronics' factory space:
1. Make the part.
2. Buy the part and leave facilities idle.
3. Buy the part and use facilities to make another product.

Quizplus · Accepted Answer

The Answer of Victory Electronics makes a part used in the manufacture of desktop computers. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $27.00 per part. Victory Electronics needs 80,000 parts per year. The cost of manufacturing 80,000 parts is computed as follows:
  
If Victory Electronics buys the part, it would pay $.40 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 40% of fixed manufacturing overhead costs. Victory Electronics' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $65,000.
Prepare an analysis to show which alternative makes the best use of Victory Electronics' factory space:
1. Make the part.
2. Buy the part and leave facilities idle.
3. Buy the part and use facilities to make another product.

Victory Electronics Makes a Part Used in the Manufacture of Desktop