Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products.Data concerning the unit production costs of the B345 gasket follow: An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires.If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labor is a variable cost.
Required:
a.Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets.If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations.
b.Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually.What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

Question

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products.Data concerning the unit production costs of the B345 gasket follow:

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires.If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided.Assume that direct labor is a variable cost.
Required:
a.Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets.If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations.
b.Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually.What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

Harshit Kothari · Accepted Answer

Final Answer :

a.The analysis of the alternatives follows below:

* 25% × $0.24
The company should make the part rather than buy it from the outside supplier because it costs $0.02 less under that alternative.
b.The maximum acceptable price is $0.54 because that is the cost to the company of making the part itself when the opportunity cost is included: a.The analysis of the alternatives follows below: * 25% × $0.24 The company should make the part rather than buy it from the outside supplier because it costs $0.02 less under that alternative. b.The maximum acceptable price is $0.54 because that is the cost to the company of making the part itself when the opportunity cost is included:

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