Snipe Company has been purchasing a component, Part Q for S 1920 per unit. Snipe

Question

Snipe Company has been purchasing a component, Part Q for S 1920 per unit. Snipe is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q is estimated as follows 6. Direct materials Direct labor Variable factory overhead Fixed factory overhead Total $11.50 4.50 1.12 3.15 20.27 Should Snipe Company buy part Q externally or make them internally. Prepare differential analysis to support your decision a. b. If Snipe Company can rent the production facility to Jordan Company for $150,000 when they purchase partQ externally, should Snipe Company buy part Qexternally or make them internally. Prepare differential analysis to support your decision

Explanation / Answer

Differential Analaysis Make Buy Direct Material $11.50 0 Direct Labor $4.50 0 Variable factory Overhead 1.12 0 Purchase 19.2 Total cost $17.12 $19.20 Cost saved if made(19.2-17.12) $2.08 It is better to make than buy as the variable cost is less. Note: as the company is operating at 70% capacity so it has execss capacity. Fixed cost are irrelevant as if Part Q is not made than also it will be incurred

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