Smith Company needs 1,000 units of a certain part for its manufacturing process.
ID: 2503443 • Letter: S
Question
Smith Company needs 1,000 units of a certain part for its manufacturing process. It can buy the part from Jones Company for $106. Smith Company's plant can manufacture the part for the following unit costs:
Direct materials
$12
Direct manufacturing labor
$48
Variable manufacturing overhead
$24
Fixed manufacturing overhead
$30
Total
$114
If Smith Company buys the part from Jones Company instead of manufacturing it, 40 percent of the fixed manufacturing overhead will be avoided. Should they make it or buy it? Show your calculations.
Direct materials
$12
Direct manufacturing labor
$48
Variable manufacturing overhead
$24
Fixed manufacturing overhead
$30
Total
$114
Explanation / Answer
Buy it=>
Manufacturing Overhead=1000*60%*30=18000
Sourcing Cost=1000*106=106,000
Total Cost=$124,000
Manufacture it=>
Total Cost = 114 per unit
Total Cost=114*1000=114,000
Since cost for buying the parts is more, The company should make the parts.
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