Question

Wilson Development Co offered to produce televisions for us at $235 per unit to our full...

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?

Business   Accounting   
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Homework Answers

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.
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