Question

Concord, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:

Direct materials and direct labor	$12
Variable overhead	5
Fixed overhead	8
Total	$25

Saran Company has contacted Concord with an offer to sell it 5700 of the wickets for $19 each. If Concord makes the wickets, variable costs are $17 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable. Should Concord make or buy the wickets?

Buy; savings = $17100

Make; savings = $5700

Buy; savings = $5700

Make; savings = $11400

Answer 1

While taking the decision to make or buy the wicket, unavoidable fixed overheads are irrelevant for decision-making since the same will be incurred irrespective of Concord's decision to make or buy
Computation showing per unit cost of production
Particulars	Amount
Direct materials and direct labour	$12
Variable Overheads	$5
Avoidable Fixed Overheads	$3	Refer Note-1
Per unit cost of production	$20
Note-1: Out of total fixed overheads $8 per unit, $5 per unit is unavoidable and hence irrelevant for decision-making Per unit cost of buying the wicket from Saran Company is $19.
Therefore, Concord should buy the wicket from Saran Company since it would result in savings of $20-$19 = $1 per wicket
Therefore, total saving upon buying 5,700 wickets would be 5,700 wickets @ $1 per wicket = $5,700.
Hence, the third option is the correct option