Question

Bennys Corporation manufactures 20,000 wrenches each year. The following costs include direct materials of $5/unit; direct labor of $20/unit; variable manufacturing overhead of $2.50/unit and fixed manufacturing overhead of $11.00. An outside supplier has offered to sell 20,000 wrenches to Benny for $30 per wrench. If all of Benny's fixed manufacturing overhead is unavoidable, the "make or buy" decision would be:

a) Buy from supplier because Benny has a total cost per unit to make lower than the supplier

B) Buy from supplier because Harrison has a total cost per unit to make higher than the supplier

C) Make in house because the total cost per unit is lower than the cost from the supplier

D) Make in house because the variable cost per unit is lower than the cost from the supplier

Answer 1

Answer- The "make or buy" decision would be= Make in house because the total cost per unit is lower than the cost from the supplier.

Explanation- Total relevant cost per unit in making decision = Direct materials+ Direct labor+ Variable manufacturing overhead+ Avoidable fixed overhead

= $5 per unit+$20 per unit+$2.50 per unit+ Nil

= $27.50

Cost of buying from supplier = $$30 per unit

Hence costing of making is less than cost of buying, Bennys Corporation should make such units in-house due to least cost in making option.

Where-Fixed cost are totally unavoidable costs hence not relevant for decision making, should be ignored. These costs will continue to occur whether product are purchased from outside supplier or not.