Lindon Company uses 4,500 units of part X each year as a component in the assemb
ID: 2345537 • Letter: L
Question
Lindon Company uses 4,500 units of part X each year as a component in the assembly of on of its products. the company is presently producing Part X internally at a total cost of $69,000 as follows: Direct materials $16,000 Direct Labor 18,000 Variable manufacturing Overhead 10,000 Fixed Manufacturing Overhead 25,000 Total Costs 69,000 An outside supplier has offered to provide Part X at a price of 11 per unit. If Lindon stops producing Part X internally, one third of the manufacturing overhead would be eliminated.
Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.
Explanation / Answer
Make
Buy
Net income increase/(decrease)
Direct material
16000.00
0.00
16000.00
Direct labor
18000.00
0.00
18000.00
Variable MOH
10000.00
0.00
10000.00
fixed MOH
25000.00
16666.67
8333.33
Price to buy
0.00
49500.00
-49500.00
total
69000.00
66166.67
2833.33
They should buy. Net income would increase by $2,833.33
Make
Buy
Net income increase/(decrease)
Direct material
16000.00
0.00
16000.00
Direct labor
18000.00
0.00
18000.00
Variable MOH
10000.00
0.00
10000.00
fixed MOH
25000.00
16666.67
8333.33
Price to buy
0.00
49500.00
-49500.00
total
69000.00
66166.67
2833.33
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