Question

Every year Novak Industries manufactures 7,400 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Direct materials		$ 3
Direct labor		9
Variable manufacturing overhead		7
Fixed manufacturing overhead		10
Total		$29

Flintrock, Inc., has offered to sell 7,400 units of part 231 to Novak for $32 per unit. If Novak accepts Flintrock’s offer, its freed-up facilities could be used to earn $12,900 in contribution margin by manufacturing part 240. In addition, Novak would eliminate 50% of the fixed overhead applied to part 231.

(a) Calculate total relevant cost to make and net cost to buy.

Answer 1

Solution

	Make	Buy
Total relevant Cost	$     177,600	$       223,900

Working

Differential Analysis
	Make	Buy
Direct material (7400 x 3)	$       22,200.00
Direct labor (7400 x 9)	$       66,600.00
Variable Overheads (7400 x 7)	$       51,800.00
Avoidable Fixed overhead (7400 x 5)	$       37,000.00
Purchase price (7400 x 32)		$       236,800.00
Additional benefit from Buying from outside		$       (12,900.00)
Total relevant Cost	$     177,600.00	$       223,900.00

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