Jain Simmons Company needs 10,000 units of a certain part to be used in producti

Question

Jain Simmons Company needs 10,000 units of a certain part to be used in production. If Jain Simmons buys the part from Sullivan Company instead of making the part itself, Jain Simmons could not use its present facilities for another manufacturing activity. Sixty percent of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:

Cost to make the part:

Direct material $6

Direct labor 24

Variable overhead 12

Fixed overhead applied 15

$57

Cost to buy the part $53

A. In deciding whether to make or buy the part, what is Jain Simmons total relevant cost to make the part?

B. Which alternative (make or buy) is more desirable for Jain Simmons and by what amount?

C. Suppose that Jain Simmons Company is in the area of the country with high unemployment and that it is unlikely that displaced employees will find other employment. How might that impact your decision?

Explanation / Answer

For part C., subtract the cost of making the parts (48*10,000= $480,000) from the cost of buying the parts (53*10,000= $530,000) Thus it is more desirable for Simmons to make the part for a total of $50,000

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