Question

Make vs. Buy (Sourcing Decision) Eggers Company needs 37,000 units of a part to use in...

Make vs. Buy (Sourcing Decision) Eggers Company needs 37,000 units of a part to use in producing one of its products. If Eggers buys the part from McMillan Company for $100 instead of making it, Eggers will not use the released facilities in another manufacturing activity. Forty percent of the fixed overhead will continue irrespective of CEO Donald Mickey’s decision. The cost data are as follows:

Cost to make the part:
Direct materials $ 37
Direct labor 20
Variable overhead 28
Fixed overhead 20
$ 105

Required:

1. Determine which alternative is more attractive to Eggers, and by what amount.

Homework Answers

Answer #1

Differential analysis

Cost of making

Cost of buying

Increase/Decrease in income

Direct materials

37000 x 37 = 1,369,000

0

1,369,000

Direct labor

37,000 x 20 = 740,000

0

740,000

Variable overhead   

37,000 x 28 = 1,036,000

0

1,036,000

Fixed overhead  

37,000 x 20 = 740,000

296,000

444,000

Outside supplier's price

0

37,000 x 100 = 3,700,000

- 3,700,000

Total cost

$3,885,000

$3,996,000

- $111,000

Making is advantageous by $111,000.

Fixed overheads = $740,000

Unavoidable fixed overheads = 740,000 x 40%

= $296,000

Avoidable fixed overheads = Fixed overheads - Unavoidable fixed overheads

= 740,000 - 296,000

= $444,000

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