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Making the Part of Accepting the Offer to Buy

Bunny Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 11,000 units of this part are as follows:

Direct materials $25,000
Direct labor 34,000
Variable factory overhead 65,000
Fixed factory overhead 50,000

Of the fixed factory overhead costs, $9,000 is avoidable.

a. Assuming there is no alternative use for the facilities, should Bunny Company take advantage of an offer from a supplier who is willing to sell Bunny Company 11,000 units of the same part for $12.50 per unit?
b. Would your answer to Part A change if the facilities could be rented for $10,000 a year?

Solution Preview

a. $25,000 + $34,000 + $65,000 + $9,000 = $133,000 to make vs. $12.50 x ...

Solution Summary

The solution discusses if the Bunny Company should make the part or accept to buy the products.