Question

Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows: Direct materials $45,000 Direct labour 45,000 Variable factory overhead 30,000

Fixed factory overhead 70,000 Total costs $190,000 Of the fixed factory overhead costs, $30,000 is not avoidable. 2. Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $13 per unit. Assuming there is no other use for the facilities, Schmidt should a. make the part, as this would save $3 per unit. b. buy the part, as this would save $3 per unit. c. make the part, as this would save $4 per unit. d. make the part, as this would save $2 per unit. e. buy the part, as this would save $4 per unit.

Answer 1

$30,000 fixed Overhead is not avoidable so they are not relevant as they will remain same even if product is made or bought from outside.

we will prepare incremental analysis between two alternatives

	Make	Buy	Increase (decrease) in net income
Direct material	$45,000	0	$45,000
Labor	$45,000	0	$45,000
Variable OH	$30,000	0	$30,000
Fixed OH	$40,000[$70,000-30,000]	0	$40,000
Cost of buying	0	$130,000[$13*10,000]	($130,000)
Total	$160,000	$130,000	$30,000

cost saved if bought from phil company $30,000

per unit = $30,000/10,000

=$3 per unit saved

buy the part, as this would save $3 per unit.

Answer b