Question

Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 3,000 units of product OP89 for $165,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:

Costs per Unit

Direct materials $26

Direct labor $17

$Variable overhead $15

Allocated fixed overhead $4

Required: Calculate the relevant cost for producing the product. Relevant Cost Per Unit Total $0

Direct materials $

Direct labor $

Variable overhead $

Allocated fixed overhead $

Total

Calculate the additional cost or savings of producing the product internally versus purchasing the product externally, from a supplier..

Calculate the additional cost or savings of producing the product internally versus purchasing the product externally, from a supplier..

Answer 1

	Make	Buy	saving
Total Units	3,000	3,000
Direct materials (26 x 3000)	$        78,000	$                   -
Direct labor (17 x 3000)	$        51,000	$                   -
Variable overhead (15 x 3000)	$        45,000	$                   -
Allocated fixed overhead	$                 -	$                   -
Purchasing cost $	$                 -	$        165,000
Total Cost	$     174,000	$        165,000	$    9,000
Note: allocated fixed cost is not relevant for making, since it will be incurred
whether product is make inhouse or purchased outside.
Since cost of buying is, cheaper than making, it is recommended to buy outside.