Question

ABC Corporation produce a part B that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total manufacturing Cost $40,000 60,000 30,000 80,000 $210,000 Another small local manufacturer has offered to sell the same part (10,000 units) to ABC Company for $20 each. If ABC makes the part, the costs of direct material will increase by 10%. and the cost of direct labor will decrease by 5%. The fixed overhead consists of depreciation, property taxes, insurance, and supervisory salaries. All the fixed overhead would continue if ABC bought the part except that the cost of $20,000 could be avoided. If ABC decides to buy the part from outside the idle capacity will be rented to another company for $10,000 Required: A) Prepare a schedule(four columns) that compares the two alternative courses of action (Make the parts or Buy). Show totals and amounts per unit. B) According to the quantitative analysis, what is your decision? Answer: Make Total akrotal Per Buy Total Buy Total Per Unit Per Unit Total Relevant costs B) Decision......

Answer 1

Solution A:

	Make		Buy
	Per unit	Total	Per unit	Total
Purchase Price			$20.00	$2,00,000
Direct Materials	$4.40	$44,000
Direct Labor	$5.70	$57,000
Variable Overhead	$3.00	$30,000
Fixed Overhead	$2.00	$20,000
Opportunity Cost	$1.00	$10,000
Total Relevant Cost	$16.10	$1,61,000	$20.00	$2,00,000

Solution B:

Decision = Make part B