Question

Exercise 8-8 (Part Level Submission) The Ayayai Company manufactures 1,249 units of a part that could be purchased from an outside supplier for $14 each. Ayayai's costs to manufacture each part are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $3 Total S18 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. (a-b) (c-d) Your answer is partially correct. Try again (c) Calculate net cost to buy if Ayayai leases the manufacturing facilities to another company for $8,085 per yean Net cost to buy $ (d) Would your answer change if Ayayai could lease the manufacturing facilities to another company for $8,085 per year? Yes

Answer 1

current manufacturing costs for 1,249 units:

• total variable costs (including direct materials, direct labor and variable overhead) per unit = $9
• total fixed costs per unit = $9
• total costs = $18

an outside vendor offers to supply the parts at $14 per unit

all fixed manufacturing costs are unavoidable.

the net cost to buy if Ayayai is able to lease the manufacturing facilities for $8,085 per year:

net cost to buy without the lease = (purchase price - variable costs) x 1,249 units = ($14 - $9) x 1,249 = $6,245

the net cost to buy with the lease = $6,245 - $8,085 = -$1,840, which means that Ayayai would actually save money by purchasing the parts if it is able to lease the facilities.