Lindon Company uses 7,500 units of Part Y each year as a component in the assemb
ID: 2427375 • Letter: L
Question
Lindon Company uses 7,500 units of Part Y each year as a component in the assembly of one of its products. The company is presently producing Part Y internally at a total cost of $119,000 as follows.
Direct materials
$26,000
Direct labor
28,000
Variable manufacturing overhead
20,000
Fixed manufacturing overhead
45,000
Total costs
An outside supplier has offered to provide Part Y at a price of $12 per unit. If Lindon stops producing the part internally, one third of the fixed 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. Please state clearly whether the part should be made or bought and share your work.
$119,000
Direct materials
$26,000
Direct labor
28,000
Variable manufacturing overhead
20,000
Fixed manufacturing overhead
45,000
Total costs
An outside supplier has offered to provide Part Y at a price of $12 per unit. If Lindon stops producing the part internally, one third of the fixed 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. Please state clearly whether the part should be made or bought and share your work.
$119,000
Explanation / Answer
if order is not accepted :
Total cost = 26000 + 28000 + 20000 + 45000
= $ 119000
if order is accepted :
Direct material 26000
Direct Labour 28000
Variable manufacturing overhead 20000
Fixed manufacturing overhead[45000* (1-1/3)] 30000
Total Cost 104000
if the Lindon Company accepts the order from the outsider supplier , then it will be able to reduce the cost of making Product Y from $15000 [($119000 - $104000 )]
Therefore , interally production should be stopped, and Lindon Company should accept the order of outsider
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