Question

Plainfield Company manufactures part G for use in its production cycle. The full cost per unit for each of 10,000 units of part G manufactured per year by Plainfield are as follows: $ 3 22 Direct materials Direct labor Variable overhead Fixed overhead 5 15 $45 Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield accepts Verona's offer, the released facilities could be used to save $43,000 in relevant costs in the manufacture of part H. In addition, $4 per unit of the fixed overhead applied to part G would be eliminated. Based solely on a short- term financial analysis, which alternative is more desirable and by what amount? A) B) Alternative Manufacture Manufacture Buy Buy Buy Amount $ 10,000 $ 63,000 $ 83,000 $113,000 $ 10,000 D) E

Please show how you solved the problem and not just the answer :) Thank you!

Answer 1

Correct answer---------(C) Buy $ 83,000

Working

$83,000 will be saved if goods are purchased from outside instead of making on own.

Differential Analysis
	Make	Buy
Direct material	$ 30,000
Direct labor	$ 220,000
Variable Overheads	$ 50,000
Avoidable Fixed overhead	$ 40,000
Purchase price		$ 300,000
Additional benefit from Buying from outside		-$ 43,000
Total relevant Cost	$ 340,000	$ 257,000

.

Total Cost of Buying	$ 257,000
Total Cost of manufacturing	$ 340,000
Financial advantage of buying	$ 83,000