Question

Smithton Company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. The cost to make it includes direct materials $40. direct labor. $32 variable overhead $10 and allocated fixed overhead of $480,000 per year which are unavoidable whether they make or buy. If the case is produced Internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year Required: Calculate the total incremental cost of making 20,000 and buying 20,000 cases. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Complete this question by entering your answers in the tabs below. Costs to Make Costs to Buy Make or Buy Calculate the total incremental cost of making 20.000 cases. Incremental Costs to Make Relevant Balevant Amount per Fired Costs Unit Total Relevant Costs Tota noremental cost to make Costs to Buy >

Answer 1

Cost to make 20000 units Relevant Amount per unit Relevant Fixed Cost Total Relevant Cost Direct Material Direct Labour As $480000 are unavoidable allocated fixed overheads, will not be relevant. 82 Variable Overheads Total Variable cost per units No. of Units Total Variable cost Depreciation on New Equipment 20000 1640000 130000 200000 1640000 130000 200000 Rent Total Relevant Cost to Make 20000 cases 1970000 Cost to buy 20000 units Relevant Amount per unit Relevant Fixed Cost Total Relevant Cost Purchase Price per unit 90 No. of Units 20000 Total Purchase cost 1800000 1800000 Total Relevant Cost to buy 20000 cases 1800000 As relevant incase of purchasing cases from outside market is less, company should buy it from the outside market