Question

Victoria Technologies makes a part used in the manufacture of digital cameras management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of 24.00 per part Victoria Technologies needs 60,000 part per year. The cost of manufacturing 60,000 parts computed as follows: If Victoria Technologies buys the part, it would pay $.60 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 50% of fixed manufacturing overhead costs. Victoria Technologies' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $70,000. Prepare an analysis to show which alternative makes the best use of Victoria Technologies' 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

Answer 1

A full cost analysis is needed to conclusively determine the best use of Victoria Technologies' factory space. However, the third option of buying the part and using the factory to produce a new product with a $70,000 contribution margin initially appears to be the most advantageous.

Step-by-step explanation:

To determine the best use of Victoria Technologies' factory space, we'll analyze the three given alternatives. In the first scenario, where Victoria Technologies manufactures the part, we need more information on the current production costs to make an accurate comparison. However, for the second scenario, where Victoria Technologies may buy the part but leave the facilities idle, the cost would be $24.00 per part plus $0.60 for transportation, totaling $24.60 per part. The third option involves buying the part and using the freed factory space to produce another product with a projected contribution margin of $70,000.

Assuming the 50% of fixed overhead costs that can be avoided by not manufacturing the part is significant, and together with the additional contribution margin from the new product, the third option seems most advantageous. However, without specific numbers on Victoria Technologies' current manufacturing costs, it is not possible to conclusively determine if buying the part and using the facilities for a new product is the best option over manufacturing the part in-house. Therefore, a full cost breakdown, including fixed and variable manufacturing costs, is essential for a final recommendation.