People W Sn Shatenean en Question:2 Pager Hoon a manufacturer af outdoor lgting

Question

People W Sn Shatenean en Question:2 Pager Hoon a manufacturer af outdoor lgting ftures is operating at less than udi capacity. The plant manager s consdeige mnow manufacturing overhead is a fwed cont hat would eot be affected by the decision to manufacture the brackets. Should Paper Moon centinue to (Round answers to 2 decimal places, e.g1.64) 90 of direct labor, and $8.00 of manufacturing everhead. Seventy-five percent of the Make Buy Costs per unit Paper Moon continue to purchase the part from an outside soner. Click if you would like to Show Work for this qwestion: Oeen Show Work 62 8 9 0

Explanation / Answer

The given question is regarding the decision of make or buy.

In this type of decision making we would consider only the relevant costs.

Fixed cost is sunk cost, because it has been incurred by the entity and need not be incurred specifically for the product in the future.

Relevant cost of producing the product includes, direct material cost, direct labour cost, variable manufacturing overhead.

Relevant cost of producting a unit = $1.80 + $0.90 + ($8.00 x (100-75)%)

= $1.80 + $0.90 + $2.00

= $4.70

If the entity decide to purchase the product from outside, it has to pay $8.50 for each unit.

Therefore, it is beneficial to the entity to make the product instead of purchasing from outside.

Paper Moon should not continue to purchase the part from an outside supplier.

Make Buy Cost per unit $4.70 $8.50

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