Question

Highlander Company uses 10,000 units of a part in its production process. The costs to make...

Highlander Company uses 10,000 units of a part in its production process. The costs to make a part are:

DM per unit

$10

DL per unit

$25

VOH per unit

$15

FOH per unit

$10

Highlander has received a quote of $70 from a potential supplier for this part. If Highlander buys the part, 70 percent of the fixed overhead would continue.

Indicate whether Highlander should make or buy the part and the dollar amount difference between make and buy.

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Answer #1
Make Buy
Direct materials ( 10 * 10000 ) 100000
Direct labor ( 25 * 10000 ) 250000
Variable overhead ( 15 * 10000 ) 150000
Fixed overhead ( 10 * 10000 ) 100000 70000
Cost of purchase ( 70 * 10000 ) 700000
Total Cost 600000 770000
As the cost of buying is more than the cost of making, Highlander should make the product
Cost of buying 770000
(-) Cost of Making 600000
Dollar amount difference between make and buy 170000
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