Question

Make or Buy
Harper Company incurs a total cost of $252,000 in producing 20,000 units of a component needed in the assembly of its major product. The component can be purchased from an outside supplier for $7 per unit. A related cost study indicates that the total cost of the component includes fixed costs equal to 75% of the variable costs involved.

a. Should Harper buy the component if it cannot otherwise use the released capacity? Present your answer in the form of differential analysis.

Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers.

Cost from outside supplier	Answer
Variable costs avoided by purchasing	Answer
Net advantage (disadvantage) to purchase alternative	Answer

b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $5,000 of contribution margin?

Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers.

Cost from outside supplier	Answer
Variable costs avoided by purchasing	Answer
Contribution margin generated by new project	Answer
Net advantage (disadvantage) to purchase alternative	Answer

Answer 1

a)	Cost from outside supplier	140000
	Variable costs avoided by purchasing	144000
	Net advantage (disadvantage) to purchase alternative	4000
	Yes, Harper should buy the component due to advantage of $4000
	CALCULATION OF VARIABLE COST:
	Let the variable cost be "x"
	Total cost = variable cost + fixed cost
	252000 = x + .75x
	1.75 x = 252000
	x =144000
	Variable cost = $144000
b)	Cost from outside supplier	140000
	Variable costs avoided by purchasing	144000
	Contribution margin generated by new project	5000
	Net advantage (disadvantage) to purchase alternative	9000
	Yes, Harper should buy the component due to advantage of $9000