Question

Make-or-Buy Decision, Alternatives, Relevant Costs

Each year, Basu Company produces 13,000 units of a component used in microwave ovens. An outside supplier has offered to supply the part for $1.31. The unit cost is:

Direct materials	$0.89
Direct labor	0.27
Variable overhead	0.07
Fixed overhead	2.10
Total unit cost	$3.33

Required:

1. What are the alternatives for Basu Company?
Make the part in house or buy the part externally

2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production.
Direct materials, direct labor and variable overhead

List the relevant cost(s) of external purchase.
Purchase price

3. Which alternative is more cost effective and by how much?

Making the part in house  by $

4. What if $18,880 of fixed overhead is rental of equipment used only in production of the component that can be avoided if the component is purchased? Which alternative is more cost effective and by how much?
Buying the part from the external supplier  by $

Answer 1

Solution 1:

The alternatives for Basu Company are Make the part in house or buy the part externally.

Solution 2:

	Interenal Production	External purchase
Direct materials	11570
Direct Labor	3510
Variable Overhead	910
Purchases Price		17030
Total Relevant costs	15990	17030

Solution 3:

Making the part in house by ($17030- 15990) = $1040

Solution 4:

Buying the part from the external supplier  by (18880-$1040) = $17,840