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    What is the difference between buying and making?

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    Ellen currently makes part y-7 which is used to make a lawnmower they manufacture and sell. Following are the costs to make the product. They use 10,000 parts a year.

    Direct Material $12
    Direct Labor 18
    Variable Overhead 6

    Fixed Overhead is $80,000

    Of the $80,000, $50,000 is avoidable if we buy the part. Also, we can rent the area used to make the part for $25,000. The part can be bought for $40 and will meet our quality requirements. What is the difference between buying and making?

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    Solution Preview

    We have,
    Parts used=10,000
    Parts made (y)=10,000+7=10,007

    Cost to make the product:
    Variable cost:
    Direct material=$12*10,007=$120,084
    Direct ...

    Solution Summary

    The solution discusses the cost of making the product, accounting for the material and labor, in comparison to the cost of making the product.