2-40. A company is analyzing a make-versus-purchase situation for a component us

Question

2-40. A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering department has developed these data: Option A: Purchase 10,000 items per year at a fixed price of $8.50 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials$5.00 per item and direct labor $1.50 per item. Manufacturing overhead is allocated at 200% of direct labor ( $3.00 per item). Based on these data, should the item be purchased or manufactured? (2.4) ondation

Explanation / Answer

Option A should be chosen. This is because through Option A, the item can be obtained for $8.5. Considering Option B, the cost will be $(5+1.5+3=)$9.5>$8.5.

Thus it is more economical to purchase the item.

All the best :)

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