Eggers Company needs 30,000 units of a part to use in producing one of its produ

Question

Eggers Company needs 30,000 units of a part to use in producing one of its products. If Eggers buys the part from McMillan Company for $125 instead of making it, Eggers will not use the released facilities in another manufacturing activity. Forty percent of the fixed overhead will continue irrespective of CEO Donald Mickey’s decision. The cost data are Cost to make the part: Direct materials $48 Direct labor 21 Variable overhead 29 Fixed overhead 30 $128

Required: Determine which alternative is more attractive to Eggers Buys the part from McMillan Co or make the part? and by what amount/savings?

Explanation / Answer

Cost to Make Cost to Buy Per Unit Fixed Overhead Buy 3750000 DM 48 1440000 DL 21 630000 OV 29 870000 98 2940000 FOVH 30 900000 360000 128 3840000 4110000 Cost under making alternative is less than buying option. It will save the cost by $ 270000 Making option is recommanded

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