TCO H) Lindon Company uses 10,000 units of Part Y each year as a component in th
ID: 2425044 • Letter: T
Question
TCO H) Lindon Company uses 10,000 units of Part Y each year as a component in the assembly of one of its products. The company is presently producing Part Y internally at a total cost of $100,000 as follows.
Direct materials............................................... $20,000
Direct labor...................................................... 40,000
Variable manufacturing overhead...................... 16,000
Fixed manufacturing overhead.......................
24,000
Total costs.......................................................100,000
An outside supplier has offered to provide Part Y at a price of $10 per unit. If Lindon stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.
Required: Should Lindon Company make or buy the part? Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.
Explanation / Answer
Decision to make 10000 units of Part Y Total cost Per unit Direct Materials 20000 2 Direct Labour 40000 4 VMOH 16000 1.6 Total Variable costs 76000 7.6 Fixed costs 24000 2.4 Total costs 100000 10 Decision to buy 10000 units of Part Y Price offered for 10000 units 100000 10 Fixed costs(2/3 rds of 24000) 16000 1.6 Total costs 116000 11.6 Making the part internally is advantageous to Lindon as buying more than off-sets the savings in fixed costs- as detailed below: Savings in Fixed costs=1/3*24000= 8000 Variable costs-(100000-76000)= -24000 Excess cost of buying -16000
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