Iwasaki Inc. is considering whether to continue to make a component or to buy it
ID: 2490111 • Letter: I
Question
Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,500 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:
4.10
$21.80
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 40% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $5.70 per unit.
When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? (Round your intermediate calculations and final answer to 2 decimal places.)
$22.55
$22.19
$19.34
$24.65
Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,500 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:
Explanation / Answer
Given,
Unit product cost for manufacturing in the product = $21.80
It is given in the problem that making the component uses 2 minutes on the machine that is the company's current constraint & If the component was bought, this machine time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $5.70 per unit.
Therefore, cost of making the component should be compared to the price of buying the component = $21.80+(5.7/2) = $24.65
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