Question

Cirrus Company has calculated that the cost to make a component is made up of materials, $120; variable labour, $60; variable overhead, $30; and fixed overhead, $25. Another company has offered to make the component for $140.

If Cirrus has spare capacity and wants to retain its skilled labour force, what is the benefit of making of buying the components?

Select one:

a. $40 benefit to buy the component

b. $10 benefit to make the component

c. $20 benefit to make the component

d. $10 benefit to buy the component

Clear my choice

Answer 1

Here, according to the question Cirrus Company has two choices, either to manufacture it internally or to outsource it to some other company.

We are assuming thet the overhead cost both variable and fixed are not directly associated with manufacturing of the component.

Hence, total cost associated with manufacturing of the component= $180(calculated by adding up material of $120 and variable labour of $60).

The benefit of buying the component will be $40(calculated by subtracting $140, the cost offered by another company from $180 calculated previously)

The answer will be "a".

Hope this answer your question

Good Luck.