MAKE – OR – BUY (OUTSOURCING)
DiGabriele Co. is currently producing 20,000 components at a cost of $16 per unit. At this level of production, total fixed overhead costs are $100,000.
An outside supplier has offered to sell 20,000 units to DiGabriele for $14 a unit.
The normal production per-unit costs are shown below:
Per Unit
Direct materials $ 2
Direct Labor 4
Variable overhead 5
Fixed overhead 5
$ 16
REQUIRED:
Consider the following two situations INDEPENDENTLY
Particulars | In-house production cost | Buy from outside supplier | Decision to be taken | ||
Amt | |||||
No. of components produced | 20000 | ||||
Variable cost | 11 | 220,000 | |||
Fixed cost (1,00,000) / (20,000*5) | 100,000 | ||||
Total production cost | 320,000 | 280,000 | DiGabriele should consider buying from outside given that the cost is lesser as compared to in house production | ||
Situation 1 | Total production cost in house | 320,000 | |||
Lease cost received | - 75,000 | ||||
Total cost | 245,000 | 280,000 | DiGabriele should consider producing it inhouse | ||
Situation 2 | Variable cost | 220,000 | |||
Fixed cost (80% is avoidable) | 20,000 | ||||
Total cost | 240,000 | 280,000 | DiGabriele should consider producing it inhouse |
MAKE – OR – BUY (OUTSOURCING) DiGabriele Co. is currently producing 20,000 components at a cost...
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