Question

Mighty Safe Fire Alarm is currently buying 57,000 motherboards from MotherBoard, Inc. at a price of $66 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $31 per unit; direct labor, $11 per unit; and variable factory overhead, $15 per unit. Fixed costs for the plant would increase by $80,000. Which option should be selected and why?

a.buy, $433,200 more in profits

b.make, $513,000 increase in profits

c.buy, $80,000 more in profits

d.make, $433,200 increase in profits

Answer 1

	Make	Buy
Direct material	57,000*$31 = $1,767,000
Direct labor	57,000*$11 = $627,000
Variable overhead	57,000*$15 = $855,000
Fixed overhead	$                                   80,000
Purchase cost		57,000*$66 = $3,762,000
Total Cost	$                             3,329,000	$                             3,762,000

if company make the product, their profit will increase by $433,000. they should make the product.

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