Question

Penguin Company needs 10,000 units of Part A to use in one of its products. The following information is available:



Cost to Penguin to make Part A:



Direct Materials	$6
Direct Labour	$14
Variable Manufacturing Overhead	$7
Fixed Manufacturing Overhead	$10
Total Manufacturing Cost Per Unit	$37

Giraffe Company has offered to sell Part A to Penguin Company for $36. If Penguin were to buy Part A from Giraffe instead of making it, 40% of the fixed manufacturing overhead costs would continue. If Penguin were to buy Part A from Giraffe, Penguin would be able to use the manufacturing facility to produce Part B that would generate a segment margin of $20,000.

Should Penguin make Part A or purchase from Giraffe? (Show all calculations)

Answer 1

Answer:

Particulars	Make	Buy
Purchase	$                 -	$                36
DM	$                  6	$                 -
DL	$                14	$                 -
VMOH	$                  7	$                 -
FMOH	$                10	$                  4
Total manfacturing cost per unit	$                37	$                40
Units	10,000	10,000
Total manufacturing cost	$      370,000	$      400,000
Less:Contribution from Part B	$                 -	$       (20,000)
Net relevant cost	$      370,000	$      380,000

Conclusion: It is recommended to make Part A as it is more economical than buying it.