Company incurs the following estimated annual costs in making a subassembly for

ID: 2377333 • Letter: C

Question

Company incurs the following estimated annual costs in making a

subassembly for one of its products:

Total Cost for

20,000 units Unit Cost

Factory Overhead:

Variable $ 300,000 $15

Fixed $ 960,000 $48

Direct Labor $ 900,000 $45

Direct Materials $ 600,000 $30

Another manufacturer offers to sell Company the same subassembly for $96 per

unit for 20,000 units per year. Determine whether Company should make or buy the

subassembly, assuming that the plant capacity now used to make the subassembly would

become idle if they were purchased and that $200,000 of the fixed factory overhead could be avoided by not making the subassembly.

total per unit relevant cost of production=15+45+30+200000/20000=100

total per unit relevant cost of buying =96

so buying the subassembly is a better option..

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