Question

Agler Corporation currently manufactures a sub assembly for its main product. The costs per unit are as follows:
Direct materials 1
Direct labor 10
Variable overhead 5
Fixed overhead 8
Total $ 24
Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the sub assemblies for $17 each. If Agler buys the sub assemblies, $2 of the fixed overhead per unit will be allocated to other products.
Should Agler make or buy the sub assemblies?

Answer 1

Answer:

they should buy the sub assemblies

Explanation:

The costs per unit are as follows:

• Direct materials $1
• Direct labor $10
• Variable overhead $5
• Fixed overhead $8
• Total $24

offer from an outside vendor = $17 per unit

non-avoidable fixed costs = $8 - $2 = $6

                              alternative 1                alternative 2          differential

                              keep producing          purchase               amount

purchase cost                        $0                     $17                     $17

avoidable costs                     $18                     $0                    ($18)

total                                        $18                    $17                      ($1)

if the company decides to purchase the parts from an outside vendor it will save $1 per unit.