Premier Company manufactures gear model G37, which is used in several of its farm-equipment products. Annual...
Premier Company manufactures gear model G37, which is used in several of its farm-equipment products. Annual production volume of G37 is 20,000 units. Unit costs for G37 are as follows:
| Direct materials costs | $55 |
| Direct labor costs | $30 |
| Variable overhead costs | $25 |
| Fixed overhead costs | $15 |
| Total Costs | $125 |
Alternatively, Premier can purchase gear model G37 from an outside supplier for $120 per unit. If G37 is outsourced, Premier can use the facility where G37 is currently manufactured for
production of another gear—model G49. This would save Premier $113,000 in facility rental and other costs presently incurred.
1. Should Premier make or buy G37? By how much will Premier be better off by choosing your decision rather than the alternative?
MCQ format
Homework Answers
Differential analysis
| Make | Buy | |
| Direct material | 1100000 | |
| Direct labor | 600000 | |
| Variable overhead | 500000 | |
| Purchase cost (20000*120) | 2400000 | |
| Opportunity Cost | 113000 | |
| Total relevant cost | 2313000 | 2400000 |
Company should make G37.
If we make G37 Net operating income increase by (2400000-2313000) = $87000
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