Question

Question (write the answer in text form dont post the picture of the answer ) The estimated costs of producing 6,000 units of a component are:
	Per Unit
Direct Material	$10
Direct Labor	8
Applied Variable Factory Overhead	9
Applied Fixed Factory Overhead	12
$1.5 per direct labor dollar

The same component can be purchased from market at a price of $29 per unit. If the component is purchased from market, 25% of the fixed factory overhead will be saved.

Required:

1. Should the component be purchased from the market? (1.5 marks)
2. Being a production manager, provide your logical opinion on choosing between purchasing the component from market or producing in-house

Answer 1

Data Given in Question:

1. Direct Material: $10

2. Direct Labour: $8

3. Applied factory variable overhead: $9

4. Fixed Overhead: $1.5 per direct Dollar. ( No impact on decision, because it is occur even if no product manufacture, but we consider saving of this cost if we buy from market i..e. 25% of Fixed Overhead.

Now we consider only relevant cost to take decision for make or Buy.

Statement of Cost of Current manufacturing cost of Product
Particulars	Amount
Direct Material	$10
Direct Labour	$8
Applied variable factory overhead	$9
Applied Fixed Factory Overhead (25% of $12)	$3
Total Cost for make product	$30
Purchase price of Product	$29
Saving in purchase form open market	$1

Total Saving= $1*6000= $6000.

In our opinion we purchase product from market due to saving in cost of $6000.