Question

Use the following to answer questions 25-26:
Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made.
Cost to Rams to make the part: (per unit)
Direct Labor:$26

Direct Materials:$12

Fixed overhead $10
Cost to buy the part from Steelers Company - $42 per unit

25. In deciding whether to make or buy the part, Rams' total relevant costs to make the part are:
    a. $760,000
    b. $840,000
    c. $880,000
    d. $960,000

26. What decision should Rams make, and what is the total cost advantage that would result?
    a. Make, $40,000
    b. Make, $120,000
    c. Buy, $80,000

Answer 1

25	c. $880,000
		Make
	Direct materials	12
	Direct labor	26
	Fixed overhead	6
	Total annual cost	44
	Total relevant costs to make the part are		$880,000
	(20,000 x $44)
26	a. Make, $40,000
	(20,000 x $2)
		Make	Buy	Difference
	Direct materials	12	-
	Direct labor	26	-
	Fixed overhead	6	-
	Purchase price	-	42
	Total annual cost	44	42	2