Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 57,500 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Direct materials	$44.15
Direct labor	10.90
Variable overhead	3.00
Fixed overhead	4.70
Total	$62.75

Of the total fixed overhead assigned to ABS-43, $15,180 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $57.95. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

Required:

1. Should Wehner Company make or buy Part ABS-43?
Wehner should   the part. This will produce total cost savings of $.

2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier? Round your answer to the nearest cent.
$ per unit

Answer 1

Part 1)

Firstly we have to calculate relevant cost to make the product

= direct material +direct labour +variable overheads + avoidable fixed cost per unit

= 44.15+ 10.9+3 +(15180/57500)

= $ 58.314

Since the relevant cost to make the product is more than to buy, so we should buy the product

This will produce total cost saving of

= (58.314-57.95)×57500

= $ 20930

Thus the final answer is

Wehner should buy the part. This will produce total cost savings of $ 20930

Part 2) the maximum amount that wehner would be willing to pay will be relevant making cost that is $ 58.31 (rounded off to nearest cent)

Thus the correct answer is $ 58.31