Reference no: EM132955621

Pixon Company makes 40,000 units per year of a part it uses in the products it manufacturers. The standard unit cost of this part is computed as follows:

Direct materials........................................ $23.40

Direct labor............................................ 22.30

Variable manufacturing overhead................... 1.40

Fixed manufacturing overhead......................  24.60

Standard unit cost..................................... $71.70

An analysis of this computation shows that $21.90 of the fixed manufacturing overhead cost ($24.60) being applied to this part comes from a company-wide overhead allocation and would be assigned to other products if this part is no longer made. An outside supplier has offered to sell this part to the company for $59.20 per unit (the supplier will sell as many units as Pixon would need).

Problem a. Should Pixon purchase this part from the outside supplier? Why or why not? Show the details of your analysis.

Problem b. A new situation has arisen: Pixon just learned that if it purchases this part from the outside supplier for $59.20 per unit, the facilities currently being used to make this part could be rented to another company for $352,000 per year. In light of this new development, re-evaluate the decision in a. That is, should the company purchase this part from the outside supplier, or should the company continue making this part internally?

Problem c. Considering the new development in b., what is the maximum purchase price per unit Pixon should be willing to pay the outside supplier for supplying 40,000 units of this part each year?