Question

Exercise 5 Your Company makes 5000 units of a component part. At this level of activity, the cost per part is: Direct materials $3.00 Direct labor $4.00 $2.00 Fixed manufacturing overhead $6.00 Total cost per part $15.00 An outside supplier has offered to sell the parts to Your Co. for $12 each. If Your Co. accepts this offer, it will be able to increase production of another product and earn an additional $15000 profit. Of the fixed manufacturing overhead, 60% is allocated and 40% direct. Complete the following table to determine whether you should make or buy the part.

Answer 1

	Make	Buy	Working
Direct materials	15,000		5,000*3
Direct labor	20,000		5,000*4
variable manufacturing overhead	10,000		5,000*2
Direct fixed manufacturing Overhead	12,000		5,000*6*40%
Allocated fixed manufacturing overhead	-		5,000*6*60%
purchase price		60,000	5,000*12
Opportunity cost	15,000
Total cost	72,000	60,000

Note: We do not consider Allocated fixed manufacturing overhead in decision making.

The difference in cost = 72,000 - 60,000 = $12,000

We should BUY the part.