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

The computation is shown below:-

Cost paid to outside supplier = 50,000 * $2.45
= $122,500
now,
Cost of producing 50,000 units of product A = Direct material + Direct labor + Variable manufacturing overhead
= (50,000 * 0.85) + (50,000 * 0.65) + (50,000 * 0.40)
= 42,500 + 32,500 + 20,000
= 95,000
Therefore, Jurban sould make the product and the profit will be
= Cost paid to the outside supplier - Cost of producing 50,000 units of product A
= $122,500 - $95,000
= $27,500