Question

Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,100 units of product OP89 for $121,800. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:

	Cost per Unit
Direct materials	$	29
Direct labor		17
Variable overhead		15
Allocated fixed overhead		3

Required:

1. What is the relevant cost per unit to make the product internally?

2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?

Answer 1