<p>Jo Company makes and uses 20,000 units of a component part each year to produ

Question

<p>Jo Company makes and uses 20,000 units of a component part each year to produce a product.&#160; Costs for the component part include $4 for direct materials, $10 for direct labor, $6 for variable factory overhead, and $8 for unavoidable fixed factory overhead.&#160; &#160;Jo is considering an offer from a reputable outside supplier to provide the needed units for $24 per part.&#160;</p>
<p>Should Jo accept the offer? (Yes or No)&#160;&#160;&#160;&#160; ________________</p>
<p>Why or why not?&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;</p>

Explanation / Answer

Make

Buy

Net Income(increase or decrease)

Direct Materials

4

0

4

Direct labor

10

0

10

Variable OH

6

0

6

Unavoidable OH

8

8

0

Cost to buy

0

24

-24

Total

28

32

-4

No - should not accept the offer. It will cost 4 more dollars per unit to buy than to make

Make

Buy

Net Income(increase or decrease)

Direct Materials

4

0

4

Direct labor

10

0

10

Variable OH

6

0

6

Unavoidable OH

8

8

0

Cost to buy

0

24

-24

Total

28

32

-4

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