Question

Mother Hubbard Company purchases 8,000 units of a part that it needs for production of its product. Notification has just been received from the supplier that a price increase will take effect shortly, which will bring the price of each part to $25. Mother Hubbard Company is considering using some idle facilities to produce the part. The production costs to produce the needed 8,000 parts are as follows:

Direct materials $17,500

Direct labor 30,000

Variable factory overhead 14,000

Fixed factory overhead 33,500

The idle facilities could also be rented out at an annual rent of $99,000. All the factory overhead costs are avoidable.

Required: Determine if Mother Hubbard Company should continue to buy the part or produce it in-house.

Answer 1

MAKE Or BUY
PROPOSAL TO MANUFACTURE OR PURCHASE FROM OUTSIDE
	Make the 8,000 Units	Purhcase 8,000 Units from Outside	Difference ( Make - Outsource)
Direct Materials	$                    17,500	$                                 -	$                       17,500
Direct Labor	$                    30,000	$                                 -	$                       30,000
Variable Overhead	$                    14,000	$                                 -	$                       14,000
Fixed Overhead	$                    33,500	$                                 -	$                       33,500
Purchase Price from Outside (8,000 Units X $ 25)	$                             -	$                      200,000	$                   -200,000
Opportunity Cost	$                    99,000	$                                 -	$                       99,000
Total Differential cost per unit	$                  194,000	$                      200,000	$                       -6,000
If we can make the product than total cost =	$                  194,000
IF we can purchase from outside than total relevant Cost =	$                  200,000
Difference is	$                     -6,000
Decission : Mother Hubbard company should produced it in house