Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 51,300 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Direct materials	$43.00
Direct labor	10.85
Variable overhead	3.25
Fixed overhead	4.30
Total	$61.40

Of the total fixed overhead assigned to ABS-43, $10,517 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $56.95. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

Required:

1. Should Wehner Company make or buy Part ABS-43?
Wehner should the part. This will produce total cost savings of $.

2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier? Round your answer to the nearest cent.
$ per unit

Answer 1

1	Calculation of Relevant cost of manufacture 51,300 units
	Particulars	Amount
	Direct materials (51,300*43)	$2,205,900
	Direct labor (51,300*$10.85)	$556,605
	Variable overheads (51,300*3.25)	$166,725
	Avoidable fixed cost (Lease for machine)	$10,517
	Total relevant cost of manufacture (A)	$2,939,747
	Cost of purchase from outside (51,300*$56.95) (B)	$2,921,535
	Savings for purchase from outside (C=A-B) (2,939,747-2,921,535)	$18,212
	Wehner Company should buy part from outside since there is a benefit of $18,212 for 51,300 units purchase from outside
2	maximum amount per unit that Wehner would be willing to pay to an outside supplier
	Maximum price per unit (2,939,747/51,300)	$57.305