Question
In: Accounting
The Sly Furniture Company manufactures furniture and can make or buy a particular subcomponent. The cost...
The Sly Furniture Company manufactures furniture and can make or buy a particular subcomponent. The cost to manufacture the subcomponent is $10 for direct materials, $8 for direct labor, and $12 for variable overhead. In addition, a supervisor is needed to oversee production of the subcomponent at an annual salary cost of $50,000. If Sly requires 100,000 subcomponents per year, the maximum purchase price per unit Sly should consider paying is
: Select one: a. $18.00. b. $30.00. c. $30.50. d. $12.50.
Solutions
Expert Solution
In order to decide whether to make or to buy a product, the relevant cost for that product is essential is to be considered. Relevant cost includes cost to produce (variable cost), any avoidable fixed cost, any opportunity cost.
In the given case, $ 30 is the variable cost per subcomponent [10 + 8 +12] will be incurred if the subcomponent is manufactured. Also if the product is manufactured, a supervisor will be needed at annual salary of $50000. This salary is AVOIDABLE fixed cost and will be considered as Relevant for decision making.
Relevant cost calculation:
Avoidable fixed cost = $ 50,000, per unit avoidable fixed cost =
50000/100000 = $ 0.5 per unit of subcomponent.
Total Variable cost = $ 30
Total Relevant cost = $0.5 + $ 30 = $ 30.5 per subcomponent.
Sly furniture company will be at advantage if it buys the subcomponent until the purchase price is LESS than or Equal to the relevant cost of producing the subcomponent. If purchase price exceeds $ 30.5, Sly Furniture will be at disadvantage.
Hence, Maximum purchase price per unit Sly should consider paying = $ 30.5 - OPTION 'c'
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