Question

Vaughn Manufacturing can produce 100 units of a component part with the following costs: Direct Materials $14000 Direct Labor 5500 Variable Overhead 9000 Fixed Overhead 11000 If Vaughn Manufacturing can purchase the component part externally for $35000 and only $4000 of the fixed costs can be avoided, what is the correct make- or-buy decision? Make and save $500 Buy and save $500 OMake and save $2500 Buy and save $6500

Answer 1

Question 1

Correct answer-------Make and save $2500

Working

Total Cost of Buying	$ 35,000
Total Cost of manufacturing	$ 32,500
Financial advantage of making	$ 2,500

.

Differential Analysis
	Make	Buy
Direct material	$ 14,000
Direct labor	$ 5,500
Variable Overheads	$ 9,000
Fixed overhead	$ 4,000
Purchase price		$ 35,000
Total relevant Cost	$ 32,500	$ 35,000

Question 2

Correct answer-------$30,500

The maximum cost that company can pay is the relevant cost of producing 60000 CDs

	Make
Direct material	$ 11,500
Direct labor	$ 13,500
Variable Overheads	$ 1,500
Avoidable Fixed overhead	$ 4,000
Total relevant Cost of making	$ 30,500