TCO H) McMullen Co. uses 10,000 units of Part X each year as a component in the
ID: 2415718 • Letter: T
Question
TCO H) McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows.
Direct materials
$40,000
Direct labor
30,000
Variable manufacturing overhead
25,000
Fixed manufacturing overhead
30,000
Total costs
$125,000
An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.
Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Please state clearly whether the part should be made or bought and share your work
Direct materials
$40,000
Direct labor
30,000
Variable manufacturing overhead
25,000
Fixed manufacturing overhead
30,000
Total costs
$125,000
Explanation / Answer
Current cost for 10000 units= $125000
Cost in case bought directly=10000*10 -10000= $90000
Since the total cost is less in case the part is bought, the company should go with buying directly instead of manufacturing. Total savings would be $35000
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