Question

Make or Buy Assignment

RJ Electronics manufacturing a variety of computer appliances. An outside supplier offered to sell a Headset called Genius to RJ Electronics for $28 per unit

To evaluate this offer, RJ has gathered the following information relating to its own cost of producing the Headsets internally:

Details	16,000 unit per year
Direct materials	160,000
Direct labor	128,000
Variable manufacturing overhead	96,000
Fixed manufacturing overhead – traceable	80,000
Fixed manufacturing overhead – common but allocated to headset line	224,000
Total Cost	688,000

Required:

Assuming that traceable overhead includes 30% headset line maintenance and 70% advertising for headsets only, should the outside supplier’s offer be accepted?

Analysis should be done based on both total and differential approaches.

Answer 1