Question

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

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

Direct Materials	0.85
Direct Labor	0.65
Variable Manufacturing Overhead	0.40

Answer 1

Statement Showing Make or Buy Decision
	Make	Buy
Direct Material (50000X 0.85)	$42,500
Direct labour (50000X 0.65)	$32,500
Variable manufacturing Overhead (50000X 0.40)	$20,000
Fixed cost buying from Suppplier (50000X$2.45)		$1,22,500
Total Cost	$95,000	$1,22,500
Net Saving in Make instead of Buy	$27,500
* Fixed Cost is Sunk cost which is irrelevant hence not connsider in analysis

Hence, it's recommended to make the [product inhouse despite of buy from outside Supplier.