In: Accounting
Mita Company currently manufactures a subassembly for its main product. The costs per unit are as follows.
Direct Materials |
$4.00 |
Direct Labour |
$30.00 |
Variable overhead |
$15.00 |
Fixed Overhead (allocated) |
$25.00 |
Total |
$74.00 |
Excel Co. has contacted Mita Company with an offer to sell it 5000 subassemblies for $55 each.
Required
d. What qualitative factors should the accountants and managers of Mita Company consider in their ‘make or buy’ decision
Answer 1:
It is important because avoidable fixed costs are relevant costs in a decision making whereas unavoidable fixed costs are irrelevant to the decision making process.
Answer 2:
Buy the parts | Make the parts | Difference | |
Purchase Cost | $ 55 | $ 55 | |
Direct material | $ 4 | $ (4) | |
Direct Labor | $ 30 | $ (30) | |
Variable Manufacturing overheads | $ 15 | $ (15) | |
Total | $ 55 | $ 49 | $ 6 |
Mita should MAKE the parts.
Answer 3:
Buy the parts | Make the parts | Difference | |
Purchase Cost | $ 55 | $ 55 | |
Direct material | $ 4 | $ (4) | |
Direct Labor | $ 30 | $ (30) | |
Variable Manufacturing overheads | $ 15 | $ (15) | |
Fixed Manufacturing overheads | $ 10 | $ (10) | |
Total | $ 55 | $ 59 | $ (4) |
Mita shoul BUY the parts.
Answer 4:
Qualitative factors are:
In case of any doubt, please feel free to comment.