Question

19. Marathon Manufacturing Company can make 10,000 units of a necessary component part with the following costs per unit: Direct Materials $15 Direct Labor Variable Overhead Fixed Overhead Product cost per unit $55 Marathon Manufacturing Company can purchase the component externally for $38 per unit. Only 25% of the total fixed costs can be avoided. What is the correct make-or-buy decision in order to maximize net income? a. Make and save $12,000 6 Buy and save $12,000 C. Make and save $20,000 Buy and save $20,000

Answer 1

Correct option is: d. Buy and save $20,000
Workings:
	Buy	Make	Difference
Cost to buy	$                   38.00		$    38.00	Higher
Direct material		$                         15.00	$   -15.00	Lower
Direct labor		$                         12.00	$   -12.00	Lower
Variable overhead		$                           8.00	$     -8.00	Lower
Fixed overhead	$                   15.00	$                         20.00	$     -5.00	Lower
Total cost	$                   53.00	$                         55.00	$     -2.00	Higher
Therefore Total savings in buying	=	$2 X 10000 units
	=	$                       20,000