Question

MAKE OR BUY DECISION

Component T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows:

Direct Materials . . . . . . . . . . . . . . . . . . . . . . . $45.00

Direct Labor . . . . . . . . . . . . . . . . . . . . . . . . . . 32.00

Manufacturing Overhead Variable . . . . . . . . .    8.00

Manufacturing Overhead Fixed . . . . . . . . . . .   32.00  *

       Total Unit Product Cost . . . . . . . . . . . . . $117.00
  
* Manufacturing Overhead Fixed will remain, even if they buy the product from an outside supplier

An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Bulan chronically has idle excess capacity and no opportunity costs exist.




Required:
Is the offer from the outside supplier financially attractive? YES or NO and Why?   RECALCULATE THE UNIT PRODUCT COST WITH THE IMPORTANT (RELAVENT) NUMBERS

SHOW CALCULATIONS:

CALCULATE CORRECTED TOTAL RELAVENT COST OF PRODUCT WE MAKE

Answer 1

	Make	Buy
Direct materials	45.00
Direct labor	32.00
Variable overhead	8.00
Fixed overhead	-
Purchase price	-	101.00
Total annual cost	85.00	101.00
NO
Since an outside supplier has offered to sell components for $101 each,
but only cost the company $85 each to make the internal components,
it is not a financially attractive offer.