Unformatted text preview: than the total cost to produce the units at the existing level of operations. EXAMPLE OF MAKE OR BUY DECISION Cost to make Part #417 as opposed to simply going outside and purchasing the part from vendors. UNIT COST UNIT COST Breakeven TO MAKE to BUY Make or Buy Direct materials per unit $0.45 $0.45 Direct labor per unit $0.50 $0.50 Factory overhead per unit $0.50 0.25 1.20 Cost to make $1.45 $1.20 $1.20 ALTHOUGH IT APPEARS TO BE CHEAPER TO JUST BUY THE PART FROM A VENDOR, THE COMPANY MUST ACCOUNT FOR THE $0.50 OF OVERHEAD PER UNIT THAT WILL STILL BE INCURRED REGARDLESS OF WHETHER YOU MAKE OR BUY. THEREFORE, COMPANY MUST ELIMINATE AT LEAST $0.25 OF OVERHEAD PER UNIT BEFORE IT BECOMES BREAKEVEN WHETHER TO MAKE OR BUY. IF THE COMPANY CANNOT FIND A WAY TO ELIMINATE THE OVERHEAD FOR AT LEAST $0.25 PER UNIT THEN YOU WOULD CHOSE TO MAKE THE PRODUCT RATHER THAN BUY....
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This note was uploaded on 02/01/2011 for the course ACCT 203 taught by Professor Hylton during the Summer '08 term at George Mason.
- Summer '08