Question

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 15,400 units of the part that are needed every year.

	Per Unit
Direct materials	$	2.30
Direct labor	$	3.30
Variable overhead	$	6.10
Supervisor's salary	$	6.60
Depreciation of special equipment	$	7.70
Allocated general overhead	$	4.80

An outside supplier has offered to make the part and sell it to the company for $27.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $21,400 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

	make	buy
Direct Materials
Direct Labor
Variable overhead
Supervisor's salary
Depreciation of special equipment
Allocated general overhead
Outside purchase price
Total cost

The total cost of the "make" alternative is ____by____. Therefore, the company should _____ the part.

Answer 1

a. Report showing financial impact of buying or making:
	Cost per unit
	Make	Buy	Calculation
Direct Mat.	2.3
Direct Labor	3.3
Variable OH	6.1
Supervisor's salary	6.6
Dep. Of special equip.	7.7
Allocated general OH	4.8	3.41	((15400*4.8)-21400)/15400
Outside purchase price		27
Total Cost	30.8	30.41
b. The total cost of the "Make" alternative is $30.8 by $30.41. Therefore
the company should Buy the part.