Question

 

Make or Buy

Blasingham Company is currently manufacturing Part Q108, producing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows:

Direct materials	$ 6.00
Direct labor	2.00
Variable overhead	1.50
Fixed overhead	3.50
Total	$13.00

Of the total fixed overhead assigned to Q108, $77,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor—neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $11. There is no alternative use for the facilities currently used to produce the part.

Required:

1. Conceptual Connection: Should Blasingham Company make or buy Part Q108?

Buy

2. What is the most that Blasingham would be willing to pay an outside supplier? If required, round your answer to the nearest cent.

$ ????? per unit

3. If Blasingham buys the part, by how much will income increase or decrease?

Increase  by $????

Answer 1

Table-1

Particulars	Unit Cost in $	Total cost in $
Direct materials	6	2,10,000
Direct labor	2	70,000
Variable overhead	1.5	52,500
Fixed overhead-direct fixed overhead	2.2	77,000
Fixed overhead-Common fixed overhead (3.5x35000=122500-77000)	1.3	45,500
Total Product cost	$13	$4,55,000

Table-2

Particulars	Unit Cost in $	Total cost in $
Direct materials	6	2,10,000
Direct labor	2	70,000
Variable overhead	1.5	52,500
Fixed overhead-direct fixed overhead	2.2	77,000
Total Product cost	11.70	4,09,500

1. Blasingham Company should buy Part Q108 as additional product cost will be $11.70 per unit (Table 2) in total product cost of $13 (Table 1) because Common fixed overhead of $1.3 will be paid whether make or buy. So making will increase the burden by $0.70 per unit against buying @ $11 per unit.

2. Blasingham would be willing to pay maximum 11.70 per unit or 4,09,500 in total an outside supplier(Table 2).

3. If Blasingham buys the part, its income will increase by ($11.70x35000)-($11x35000)=$24,500