Question

Kand Company manufactures components for use in its production of mini lasers. When 10,000 items of component X77 are produced, the costs per unit are:
	Direct materials				$0.75
	Direct manufacturing labour				$2.75
	Variable manufacturing overhead				$1.25
	Fixed manufacturing overhead				$1.60
	Total Costs				$6.35
Lee Company has offered to sell to Kand Company 10,000 units of X77 for $6.00 per unit. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
	1a.        Compare Make vs Buy and show detailed relevant costs (show all calculations) (show total costs)
	1b.	Which alternative would you recommend?
	2.	If Kand was to buy the components, the plant facilities could be used to manufacture another required component at a savings of $9,000, what impact would this have on Kand Company’s decision (show all calculations and explain your position).

Answer 1

1a. Make vs Buy decision is as shown below:

Differential Analysis
Make Mini Lasers or Buy Mini Lasers
	Make Carrying	Buy Carrying	Differential Effect
Purchase Price		60,000	-60,000
Direct Material	7,500		7,500
Direct manufacturing labour	27,500		27,500
Variable manufacturing overhead	12,500		12,500
Fixed manufacturing overhead	16,000	6,000	10,000
Total Costs	63,500	66,000	-2,500

1b. Kand company should select 1st option and make the products.

2. In this case, the Kand company should purchase the mini chasers.

Differential Analysis
Make Mini Lasers or Buy Mini Lasers
	Make Carrying	Buy Carrying	Differential Effect
Purchase Price		60,000	-60,000
Direct Material	7,500		7,500
Direct manufacturing labour	27,500		27,500
Variable manufacturing overhead	12,500		12,500
Fixed manufacturing overhead	16,000	6,000	10,000
Cost Saving		-9,000	9,000
Total Costs	63,500	57,000	6,500