Iwasaki Inc. is considering whether to continue to make a component or to buy it
ID: 2344748 • Letter: I
Question
Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 12,400 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:Direct materials $ 8.20
Direct labor 5.20
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 3.00
Unit product cost $17.40
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 35% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minute on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $4.60 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.)
$17.70
$15.45
$19.70
$17.75
Explanation / Answer
you should buy it as it is less expensive than making the product and the solution of other part is $15.45
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