Question

Landry's Inc. produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:

                              Direct materials                        $ 90,000

                              Direct labor                              130,000

                              Variable factory overhead            60,000

                              Fixed factory overhead              140,000

                                    Total costs                      $420,000

Of the fixed factory overhead costs, $60,000 is avoidable.

Cooper Company has offered to sell 10,000 units of the same part to Landry's Inc for $36 per unit. Assuming there is no other use for the facilities, Landry's should ________.

  

a. buy the part, as this would save $6 per unit

   

b. buy the part, as this would save the company $60,000

   

c. make the part, as this would save $2 per unit

   

d. make the part, as this would save $6 per unit

Answer 1

Correct answer------------c. make the part, as this would save $2 per unit

Working

Per Unit Cost
	Make	Buy
Direct material	$                9.00
Direct labor	$              13.00
Variable Overhead	$                6.00
Avoidable fixed overhead	$                6.00
Outside purchase price		$              36.00
Total Cost	$              34.00	$              36.00

Cost to make is $2 less than cost per unit to buy.

The fixed cost will be $6 for above calculation as only that fixed cost is relevant which is affected by the decision. The Fixed cost of $80000 (140000-60000) will occur no matter what the decision is.