Question

P Company currently manufactures all component parts used in the manufacture of various small appliances. A steel handle is used in three different products. The current year budget for 20,000 handles has the following unit cost:

                        Direct material             $0.60

                        Direct labor                   0.40

                        Variable overhead         0.10

                        Fixed overhead            0.20

                        Total unit cost               $1.30

A steel company has offered to supply 20,000 handles to P Company for $1.25 each, which includes delivery. Should the offer be accepted?

Answer 1

No, the Offer should not be accepted

	Unit
Differential costs:	Make	Buy
Purchasing		$1.25
Direct material	0.6
Direct labor	0.4
Variable overhead	0.1
Total	1.10	$1.25
Difference		$0.15

Cost of making = $1.10 (Fixed cost is irrelevant in decision making, it will continue to be incurr irrespective of production)

Cost of Buying components from ousiders (Steel company) = $ 1.25

Thus, Making is better option

No, the Offer should not be accepted