Question

Alpha Company manufactures parts to use in its manufacturing facility at a cost of $46 per unit that includes $8 of fixed overhead. They need 30,000 of these parts annually and Bravo Company has offered to sell these units to them at $43 per unit. If Alpha decides to purchase the parts, $60,000 of the annual fixed overhead applied will be eliminated and the company may be able to rent the facility previously used for manufacturing the plugs for $50,000. If Alpha purchases the part but does not rent the unused facility, should the company make or buy the part? Show supporting computations for your answer.

Answer 1

Answer:

The company should make the parts.

Working note:

Statement of Comparative Cost
Buy the parts	Amount	Make the parts	Amount
Purchase Cost (43 * 30,000)	$ 1,290,000	Variable costs (38 * 30,000)	$ 1,140,000
Savings in fixed costs	$    (60,000)
Rental Income	$              -
Total cost	$1,230,000	Total cost	$1,140,000

The cost of make the parts is lower than the cost to buy the parts.

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