Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 53,200 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Direct materials	$45.25
Direct labor	8.55
Variable overhead	2.15
Fixed overhead	4.00
Total	$59.95

Of the total fixed overhead assigned to ABS-43, $15,800 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $55.77. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

Required:

1. Should Wehner Company make or buy Part ABS-43?
Wehner should buy  the part. This will produce total cost savings of $.

2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier? Round your answer to the nearest cent.
$ per unit

Answer 1

Part 1
		Make ABS-43	Buy ABS-43	Difference
	Direct Materials per unit	$                          45.25		$                                       45.25
	Direct labor per unit	$                            8.55		$                                         8.55
	Variable Overhead per unit	$                            2.15		$                                         2.15
	Fixed Cost per unit($15,800/53,200)	$                            0.30	$                                             -	$                                         0.30
	Purchase Cost		$                                       55.77	$                                      -55.77
	Total Cost to make/Buy	$                          56.25	$                                       55.77	$                                         0.48
	Wehner company should buy ABS-43 as it would result into a savings of $25,536($0.48*53,200 units)
Part 2	Wehner would be willing to pay a maximum of its relevant cost of $56.25 as calculated above