Teich Inc. is considering whether to continue to make a component or to buy it f

Question

Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 12,300 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows:

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 20% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, making the component uses 4 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 8 minutes on this machine and that has a contribution margin of $4.50 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? (Round your intermediate calculations and final answer to 2 decimal places.)

$19.25 per unit

$20.35 per unit

$16.93 per unit

$14.68 per unit

Direct materials $8.10 Direct labor 5.10 Variable manufacturing overhead 0.90 Fixed manufacturing overhead 2.90 Unit product cost $17.00

Explanation / Answer

Differential analysis :

So answer is c) $16.93 per unit

Make Direct material 8.10 Direct labour 5.10 Variable manufacturing overhead 0.90 Fixed manufacturing overhead (2.9*20%) 0.58 Opportunity cost (4.5/2) 2.25 Total 16.93

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