Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 56,900 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	$47.35
Direct labor	10.50
Variable overhead	2.55
Fixed overhead	3.45
Total	$63.85

Of the total fixed overhead assigned to ABS-43, $12,404 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 $60.29. 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

1

	Make	Buy
Direct Materials (47.35*56900)	2,694,215.00
Direct Labor(10.50*56900)	597,450.00
Variable Overhead(2.55*56900)	145,095.00
Direct Fixed Overhead	12,404.00
Purchase Price (60.29*56900)		3430501
Total Cost to Make/buy	3,449,164.00	3,430,501

Total cost savings if part is bought

= 3449164-3430501

=$18,663

_________________________________________

2

What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier

The maximum amount per unit that Wehner would be willing to pay

= Total Cost to Makeing / number of units

=3449164/56900

=$60.628