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Make or Buy analysis

KC manufactures part KE456 used in several of its models. Monthly production costs for 1,000 units are as follows:

Direct materials $ 40,000
Direct labor 10,000
Variable overhead costs 30,000
Fixed overhead costs 20,000
Total costs $100,000

It is estimated that 10% of the fixed overhead costs assigned to KE456 will be avoidable if the company purchases KE456 from the outside supplier. Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.

(Show your calculations)

If Konrade's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:
a. $ 82,000
b. $ 98,000
c. $ 50,000
d. $100,000

If Konrade's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:
a. increase by $2,000
b. increase by $80,000
c. decrease by $3,000
d. decrease by $85,000

The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is:
a. $80 per TE456 part
b. $82 per TE456 part
c. $98 per TE456 part
d. $100 per TE456 part

Solution Preview

If Konrade's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:
Direct materials $ 40,000
Direct labor 10,000
Variable overhead costs ...

Solution Summary

This provides the steps for make or buy analysis

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