Kingston Inc. needs 10,000 units of an electronic part to be used in production.

Question

Kingston Inc. needs 10,000 units of an electronic part to be used in production. If the company buys the part from Burlington Company instead of making it, Kingston could not use the present facilities for another manufacturing activity. The purchase price of the part is $53 per unit. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the unit cost to Kingston to make the part: Please answer the following questions. Justify your answers with computations. 1 . In deciding whether to make or buy the part, what is Kingston's total relevant cost to make the part? 2. What alternative is more desirable for Kingston and by what amount? 3. If Kingston needs 5,000 units of the part, how will your answers in 1 and 2 be different? Why?

Explanation / Answer

Net Increase in making the buying the product = 40000

Relevant cost = 490000

C)

D) Relevant cost if 5000 units are in decision = 275000

Particulars Make Buy Net Increase/ ( Decrease) Units 10000 10000 Direct Materials 70000 0 -70000 Direct Labor 240000 0 -240000 Variable Overhead 120000 0 -120000 FiXed Overhead 150000 90000 -60000 Buying Cost 0 530000 530000 Total Cost 580000 620000 40000

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