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8 May, 17:42

Harrison Enterprises currently produces 8,000 units of part B13. Current unit costs for part B13 are as follows: Direct materials $12 Direct labor 9 Factory rent 7 Administrative costs 10 General factory overhead (allocated) 7 Total $45 If Harrison decides to buy part B13, 50% of the administrative costs would be avoided. All of the company's items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Harrison for $31 per unit. What will occur if the company accepts the offer?

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  1. 8 May, 18:32
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    It is cheaper to make the part in house.

    Explanation:

    Giving the following information:

    Harrison Enterprises currently produces 8,000 units of part B13.

    Current unit costs for part B13 are as follows:

    Direct materials $12

    Direct labor 9

    Factory rent 7

    Administrative costs 10

    General factory overhead (allocated) 7

    Total $45

    If Harrison decides to buy part B13, 50% of the administrative costs would be avoided.

    To calculate whether it is better to make the par in-house or buy, we need to determine which costs are unavoidable.

    Unavoidable costs:

    Factory rent = 7

    Administrative costs = 5

    General factory overhead = 7

    Total = 17

    Now, we can calculate the unitary cost of making the product in-house:

    Unitary cost = direct material + direct labor + avoidable administrative costs

    Unitary cost = 7 + 5 + 5 = $17

    It is cheaper to make the part in house.
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