Question

Wilson Development Co offered to produce televisions for us at $235 per unit to our full requirements, it currently costs us $325 per unit. Should we accept this deal at $382 / unit? We currently use 50 000 units with the following costs

Televisions (in house production)

Direct material	$8, 600, 000
Direct labour	$3,000,000
Admin expenses	$1,500,000
Fixed manufacturing overhead	$2,000,000
Variable manufacturing overhead	$4,000,000
Total Costs	$19,100,000
Costs/ unit	$382

Wilson Dev Co offer = $235/ unit

Should we buy or make?

Answer 1

Make vs Buy
	Make	Buy	net benefit
Direct Material	8600000
Direct Labor	3000000
Variable Manufacturing Overhead	4000000
Cost of Buy (50000 x 235)		11750000
Total Relevant Cost	15,600,000	11,750,000	3,850,000
Since cost of Buying is cheaper than making inhouse we should prefer this offer at $235
Note: since admin expenses and fixed manufacturing overhead are continue to be same
irrespective of whether its made inhouse or purchased outside, its not relevant.