Question

Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,900 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials	$	9.70
Direct labor		6.70
Variable manufacturing overhead		2.50
Fixed manufacturing overhead		4.50
Unit product cost	$	23.40

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $6.10 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? (Round your intermediate calculations to 2 decimal places.)

Multiple Choice

A) $26.45 per unit

B) $23.95 per unit

C) $20.25 per unit

D) $23.30 per unit

Answer 1

70% of the fixed cost is unavoidable. 70% of Fixed manufacturing overhead is incurred whether the product is made or purchased. This 70% should not be considered.

Cost to make for comparison = $9.70 + $6.70 + $2.50 + ($4.50 X 30%) = $20.25

Option C)