Assignment – Week 6 - since it will...

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Assignment – Week 6 The costs that are relevant in a make-or-buy decision are those costs  that can be avoided as a result of purchasing from the outside. The  analysis for this exercise is: Per Unit  Differential  Costs 30,000 Units Make Buy Make Buy Cost of purchasing ................................... $21.00 $630,000 Cost of making: Direct materials .................................... $ 3.60 $108,000 Direct labor ........................................... 10.00 300,000 Variable overhead ................................. 2.40 72,000 Fixed overhead .....................................       3.00     *                         90,000                               Total cost .................................................. $19.00 $21.00 $570,000 $630,000 The remaining $6 of fixed overhead cost would not be relevant, 
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Unformatted text preview: since it will continue regardless of whether the company makes or buys the parts. The $80,000 rental value of the space being used to produce part S-6 represents an opportunity cost of continuing to produce the part internally. Thus, the completed analysis would be: Make Buy Total cost, as above. .................................................................. $570,000 $630,000 Rental value of the space (opportunity cost). ............................ 80,000 Total cost, including opportunity cost. ...................................... $650,000 $630,000 Net advantage in favor of buying. ................................................ $20,000...
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