Question

Question 15

Rod’s Manufacturing Company can make 100 units of a necessary component part with the following costs

Direct Materials          $60,000

Direct Labor                  10,000

Variable Overhead        30,000

Fixed Overhead            20,000

If Rod’s Manufacturing Company can purchase the component externally for $95,000 and only $10,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

	a.	Make and save $5,000
	b.	Buy and save $5,000
	c.	Make and save $15,000
	d.	Buy and save $15,000

Answer 1

	Cost of Making	Cost of Buying	Increase/Decrease in Income
Direct materials	60,000	0	60,000
Direct labor	10,000	0	10,000
Variable overhead	30,000	0	30,000
Fixed overhead	20,000	10,000	10,000
Outside supplier price	0	95,000	-95,000
Total cost	$120,000	$105,000	$15,000

buy and save 15,000

Correct option is d.

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