Make or Buy Wright Corporation currently manufactures a subassembly for its main

Question

Make or Buy

Wright Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials                            $ 1

Direct labor                                    10

Variable overhead                            5

Fixed overhead                                 8

Total                                             $24

Funkhouser Company has contacted Wright with an offer to sell it 5,000 of the subassemblies for $20 each. If Funkhouser makes the subassemblies, $5 of the fixed overhead per unit will be allocated to other products.

Required:

a.   Should Wright make or buy the subassemblies? Explain your answer. What would be the impact on Net Income?

b.   What if Wright could rent the space currently used to manufacture the subassemblies for $15,000. What should they do now?

c.   What other factors should Wright consider in making this decision?

Explanation / Answer

A

B

Total cost 24 Fixed Overhead 3 Cost To make 21 Cost to Buy 20 Incremental Cost to make 1 Incemental Benfit Of Buy 5000*1 5000

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