Make or Buy Decisions
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Given the following data, please answer the following:
Total Cost for 50,000 Units Cost per Unit
Direct materials $ 400,000 $ 8
Direct labor 250,000 5
Variable factory overhead 150,000 3
Fixed factory overhead 300,000 6
Total manufacturing costs $1,100,000 $22
1.Assume that the capacity now used to make parts will become idle if the parts are purchased. Should Dana buy or make the parts? Show computations.
2.Assume that the capacity now used to make parts will either (a) be rented to a nearby manufacturer for $75,000 for the year or (b) be used to make oil filters that will yield a profit contribution of $100,000. Should Dana buy or make part EC113? Show your computations.
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Solution Summary
Solution analyzes the given date to conclude whether to make or buy the parts. Answer is supported by suitable calculations.
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1. Assume that the capacity now used to make parts will become idle if the parts are purchased.
Should Dana buy or make the parts? Show computations.
Relevant costs will include direct materials, direct labor, variable factory overhead and fixed factory overhead that could be saved.
Fixed factory overhead that could be saved=150000
Fixed factory overhead that could be saved (per unit)=150000/50000=$3
Direct Materials $8.00
Direct labor $5.00
Variable factory overhead ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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