Make-or-Buy, Traditional Analysis Wehner Company is currently manufacturing Part

Question

Make-or-Buy, Traditional Analysis

Wehner Company is currently manufacturing Part ABS-43, producing 51,300 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Of the total fixed overhead assigned to ABS-43, $10,517 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $56.95. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

Required:

1. Should Wehner Company make or buy Part ABS-43?
Wehner should the part. This will produce total cost savings of $.

2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier? Round your answer to the nearest cent.
$ per unit

Direct materials $43.00 Direct labor 10.85 Variable overhead 3.25 Fixed overhead 4.30   Total $61.40

Explanation / Answer

1

Calculation of Relevant cost of manufacture 51,300 units

Particulars

Amount

Direct materials (51,300*43)

$2,205,900

Direct labor (51,300*$10.85)

$556,605

Variable overheads (51,300*3.25)

$166,725

Avoidable fixed cost (Lease for machine)

$10,517

Total relevant cost of manufacture (A)

$2,939,747

Cost of purchase from outside (51,300*$56.95) (B)

$2,921,535

Savings for purchase from outside (C=A-B) (2,939,747-2,921,535)

$18,212

Wehner Company should buy part from outside since there is a benefit of $18,212 for 51,300 units purchase from outside

2

maximum amount per unit that Wehner would be willing to pay to an outside supplier

Maximum price per unit (2,939,747/51,300)

$57.305

1

Calculation of Relevant cost of manufacture 51,300 units

Particulars

Amount

Direct materials (51,300*43)

$2,205,900

Direct labor (51,300*$10.85)

$556,605

Variable overheads (51,300*3.25)

$166,725

Avoidable fixed cost (Lease for machine)

$10,517

Total relevant cost of manufacture (A)

$2,939,747

Cost of purchase from outside (51,300*$56.95) (B)

$2,921,535

Savings for purchase from outside (C=A-B) (2,939,747-2,921,535)

$18,212

Wehner Company should buy part from outside since there is a benefit of $18,212 for 51,300 units purchase from outside

2

maximum amount per unit that Wehner would be willing to pay to an outside supplier

Maximum price per unit (2,939,747/51,300)

$57.305

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