Question

Crane’s Manufacturing Company can make 100 units of a necessary component part with the following costs:

Direct Materials $129000
Direct Labor 34000
Variable Overhead 48000
Fixed Overhead 30000

If Crane’s Manufacturing Company can purchase the component externally for $215000 and only $8000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Answer 1

Answer:

The correct decision is to purchase the component as it can save $18,000 of the company by buying.

Explanation:

The cost of making 100 units:

Cost of making = Direct materials + Direct labor + Variable overhead + Fixed overhead

= $129,000 + $34,000 + $48,000 + $30,000

= $241,000

The cost of buying 100 units:

Cost of buying = Purchase price + Unavoidable fixed cost

= $215,000 + $8,000

= $223,000

The correct decision is to purchase the component as it can save $18,000 of the company by buying.