P Company currently manufactures all component parts used in the manufacture of

Question

P Company currently manufactures all component parts used in the manufacture of various small appliances. A steel handle is used in three different products. The current year budget for 20,000 handles has the following unit cost:

                        Direct material             $0.60

                        Direct labor                   0.40

                        Variable overhead         0.10

                        Fixed overhead            0.20

                        Total unit cost               $1.30

A steel company has offered to supply 20,000 handles to P Company for $1.25 each, which includes delivery. Should the offer be accepted?

Explanation / Answer

Cost of making = $1.10 (Fixed cost is irrelevant in decision making, it will continue to be incurr irrespective of production)

Cost of Buying components from ousiders (Steel company) = $ 1.25

Thus, Making is better option

No, the Offer should not be accepted

   Unit Differential costs: Make Buy    Purchasing $1.25 Direct material 0.6 Direct labor 0.4 Variable overhead 0.1 Total 1.10 $1.25 Difference $0.15

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