Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 51,500 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	$45.35
Direct labor	10.65
Variable overhead	2.30
Fixed overhead	3.40
Total	$61.70

Of the total fixed overhead assigned to ABS-43, $11,742 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 $58.20. 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 buy 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) Relevant Cost to Produce the ABS-43 :-

Direct Materials (45.35 * 51500)	2335525
Direct Labour   (10.65 * 51500)	548475
Variable O/H (2.30 * 51500)	118450
Direct Fixed O/H	11742
	3014192

Relevant cost to buy the product = $58.20 * 51500 units = $2997300

Wehner should buy the part. This will produce total cost savings of = 3014192 – 2997300 = $16892

(2) Maximum amount per unit that Wehner would be willing to pay to an outside supplier:-

Total Manufacturing cost / 51500 units

3014192/51500 = $58.53