Question

Garett Engines Ltd. (GEL) manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the oil pumps. An outside supplier has offered to produce and sell one type of oil pump to GEL for a cost of $37 per unit. To evaluate this offer, GEL has gathered the following information relating to its cost of producing 15,200 oll pumps: 1. Direct materials cost $16 per unit. 2. GEL pays its direct labour employees $20 per hour, each oil pumps requires 30 minutes of labour time. 3. Variable manufacturing overhead is allocated at 30% of direct labour cost. 4. Total fixed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will be transferred to a different department if the company decides to purchase the oil pump from the outside supplier.

Required:
Assume that the company has no alternative use for the facilities that are now being used to produce the oil pump. Compute the total differential cost per unit for producing and buying the product.

Answer 1

The total differential cost per unit for producing and buying the oil pump is $1.

Step-by-step explanation:

To compute the total differential cost per unit for producing and buying the oil pump, we need to calculate the cost of producing 15,200 oil pumps and compare it to the cost of buying them from the outside supplier.

1. Direct materials cost per unit = $16
2. Direct labor cost per unit = (30 minutes / 60 minutes per hour) x $20 per hour = $10 per unit
3. Variable manufacturing overhead per unit = 30% x $10 = $3
4. Total fixed manufacturing cost per unit = 60% x $15 = $9
5. Total differential cost per unit for producing = $16 + $10 + $3 + $9 = $38
6. Total cost for producing 15,200 oil pumps = $38 x 15,200 = $577,600
7. The outside supplier offers to sell the oil pump for $37 per unit, so the total cost for buying 15,200 oil pumps = $37 x 15,200 = $563,200
8. The total differential cost per unit for producing and buying the oil pump is the difference between the two options: $38 - $37 = $1

Therefore, the total differential cost per unit for producing and buying the oil pump is $1.