Question

Bob Industries currently manufactures Part ABC for its main product. The costs per unit are as follows:

                                        Direct materials                                    $40.00

                                        Direct labor                                              30.00

                                        Variable overhead                                  42.00

                                        Fixed overhead                                       33.00

                                                Total                                               $145.00

Mountaineer Industries has contacted Bobcat with an offer to sell 8,000 of the part for $120.00 each. Bobcat will eliminate $60,000 of fixed overhead if it accepts the proposal. Should Bobcat make or buy the part? What is the difference between the two alternatives?

Possible Answers:

48,000 cheaper to buy the product

$12,000 cheaper to make the product

$12,000 cheaper to buy the product

$48,000 cheaper to make the product

Answer 1

Incremental analysis

	Cost of making	Cost of buying	Increase/Decrease in income
Direct materials	40 x 8,000 = 320,000	0	320,000
Direct labor	30 x 8,000 = 240,000	0	240,000
Variable overhead	42 x 8,000 = 336,000	0	336,000
Fixed overhead	33 x 8,000 = 264,000	204,000	60,000
Outside supplier's price	0	8,000 x 120 = 960,000	- 960,000
Total cost	$1,160,000	$1,164,000	- $4,000

Net incremental advantage of making = $4,000

$4,000 cheaper to make the product.

Note: Answer choices provided are not correct. Please check and reply. Thank you.

answered by: anonymous