Question

Nifty Car manufactures doors that it uses for one of its components in its new “green” automobile. The annual

costs to manufacture 40,000 of these doors are:

Direct Material

$200,000

Direct Labor

40,000

Variable Overhead

80,000

Fixed Overhead

320,000

Mackenzie Door Corporation has offered to provide the annual door needs for Nifty at $14 per door. If Nifty

accepts this offer, fixed overhead will be reduced to $192,000 for the year. In addition, Nifty has no alternative

use for the idle facilities if the decision was made to go with Mackenzie’s offer. Based on this information,

would Nifty be better off to make the doors or buy the doors and by how much?

a.

$48,000 better to buy

b.

$48,000 better to make

c.

$112,000 better to buy

d.

$112,000 better to make

Answer 1

	Cost to make	Cost of buying	Increase/Decrease in income
Direct material	200,000	0	200,000
Direct labor	40,000	0	40,000
Variable Overhead	80,000	0	80,000
Fixed Overhead	320,000	192,000	128,000
Outside supplier's price	0	40,000 x 14 = 560,000	- 560,000
Total cost	$640,000	$752,000	- $112,000

Nifty would be better off to make the doors by $112,000

Correct option is (d)

$112,000 better to make

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