Question

Sunland Company can produce 100 units of a component part with the following costs:

Direct Materials	$12000
Direct Labor	3500
Variable Overhead	9000
Fixed Overhead	11000

If Sunland Company can purchase the component part externally for $31000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Buy and save $6500

Make and save $500

Buy and save $500

Make and save $2500

Answer 1

	Make($)	Buy($)
Direct material	12,000	-
Direct labour	3,500	-
Variable Overhead	9,000	-
Fixed Overhead	11,000	7,000
Purchase price	-	31,000
Total Cost	35,500	38,000	-2,500

Make and save $2500

For any clarifications please comment.