Question

Sally manufacturing company currently makes a necessary part with the following costs:

Direct materials $80,000

Direct labor $13,000

Variable overhead $40,000

Fixed overhead $27,000

These are the current costs to make 1000 units of the part.

An outside sales person has offered to sell the part for $145 each. If the company purchases the parts, it can avoid $4,000 of the current fixed costs. What is the correct "make or buy" decision?

Answer 1

The buy or Make decision is decided as follows:

	Make ($)	Buy($)
Direct materials	80,000	145,000
Direct labor	13,000	(1000 units * $145)
Variable overhead	40,000
Fixed overhead	27,000	23,000
		($27,000 - $4,000)
Total Cost	$160,000	$168,000

The correct decision is "to Make" the parts because by making the part in the company become cheaper that buying from the outsiders, So making the parts in the company is the correct decision.