Question

Our standard costing for making component #456 (per unit) is:

DM - var $3

DL - var $4

MOH - var $9

MOH – fixed $20 (all factory rent and utilities)

TOTAL $36

We have found a supplier who can get them for us (same quality) at $30. We can't use that part of the factory for anything else. Should we switch to buying rather than making?

a. Yes, buying will save us $6 per unit

b. Yes, buying will save us $36 per unit

c. No, buying will lose us $6 per unit

d. No buying will lose us $14 per unit

Answer 1

If we buy the component#456 from outside supplier, we will able to save $ 6($36-$30). But we can't use that part(Fixed cost of MOH per unit) of factory anything else means that cost is unavoidable and unproductive that we have to inccured in both situation. only variable part of per unit cost could be avoid. Therefore

Actual saving/loss per unit if buy from = Saving from buying outside - unavoidable fixed MOH

=$6 - $20

=20(Loss)

Therefore,

Option d " No buying will lose us $14 per unit" should be chosen .