Question

Kadhim Co. manufactures product B which is a part of its main product. Kadhim Co makes 50,000 units of product B per year. The production costs are detailed below. An outside supplier has offered to supply 50,000 units of product B per year at $ 2.45 each. Fixed production cost of $ 40,000 associated with the product B are unavoidable. Should Kadhim Co make or buy the product B?

The production cost per unit for manufacturing a unit of product B are:

Direct Materials	0.85
Direct Labor	0.65
Variable Manufacturing Overhead	0.40

Answer 1

Answer: Kadhim Co should Make product B in-house, as it will save $27,500 ($122,500-$95,000)

Cost of buying from outside supplier:

50,000 unit * $2.45 per unit = $122,500

Cost of in-house making Product B:

Variable cost + Avoidable Fixed cost

[($0.85+$0.65+$0.40)*50,000 units] + 0 = $95,000

The cost which can be avoided if product is not produced, are only relevant cost, and Unavoidable cost are irrelevant.

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