Question

Part 467 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 16,000 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit $ 2.90 $ 3.90 $ 6.70 $ 7.20 $ 8.30 $ 5.40 An outside supplier has offered to make the part and sell it to the company for $28.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $22,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose? Complete this question by entering your answers in the tabs below. Required A Required B Prepare a report that shows the financial impact of buying part 167 from the supplier rather than continuing to make it inside the company. Make Buy Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Outside purchase price Total cost

Answer 1

A.

	MAKE	BUY
Direct Materials	$          46,400
Direct Labor	$          62,400
Variable Overhead	$       107,200
Supervisor's Salary	$       115,200
Depreciation on special equipment	$                   -
Allocated general Overhead	$          22,000
Outside Purchase Price		$       448,000
Total Cost	$       353,200	$       448,000

Workings:

*Direct Material = 16,000 units*$2.90=$46,400;

*Direct Labor = 16,000 units*$3.90=$62,400;

*Variable Overhead = 16,000 units*$6.70=$107,200;

*Supervisoe salary = 16,000 units *$7.20=$1115,200.

*Depreciation on special equipment - Irrelevant cost for Making the product.

*Allocated general Overhead - Specififed in the quetion and relevant for make or buy decison.

* If product is buying from outside supplier, then cost would be 16,000*$28=$4,48,000.

*Difference = $4,48,000 - $353,200 = $94,800.

B.

The total cost of the make alternative is lower by $94,800, Thus, The company Should Make the product.

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