Make or Buy: McMurphy Corporation produces a part that is used in the manufactur

Question

Make or Buy:

McMurphy Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 12,000 units of this part are as follows:

                              Direct materials                         $86,000

                              Direct labor                                126,000

                              Variable factory overhead            58,000

                              Fixed factory overhead               138,000

                                    Total costs                          $408,000

Of the fixed factory overhead costs, $55,000 is avoidable.  Conners Company has offered to sell 12,000 units of the same part to McMurphy Corporation for $41 per unit.

Should they accept Conners' offer? Explain

Explanation / Answer

Calculate relevant cost ;

They should not accept conner's offer

Make buy Direct material 86000 Direct labour 126000 Variable factory overhead   58000 Fixed factory overhead    55000 Purchase cost (12000*41) 492000 Total relevant cost 325000 492000

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