What is the difference in cost between the make and buy decision? TOTAL cost not

Question

What is the difference in cost between the make and buy decision? TOTAL cost not per unit cost.
Please be sure of fixed cost Santos Company currently manufactures one of its crucial parts incurring.the following per unit costs: $ 0.50 Direct materials Direct labor Variable overhead Fixed overhead 0.70 0.30 2.00 50,000 units are produced each year. Santos is considering purchasing the part mom a supplier for a quoted price of S 2.70 per unit. Ir Santos purchases the part, 45% of the costs can be eliminated. Should Santos make or buy the part? Type in 3 for Make and type in 2 for Buy

Explanation / Answer

MAKE..................(type 1)

working:

total costs under making and buying:

making is cheaper than buying by $15,000.

difference in total cost between make and buy decision = 135,000 - 120,000 =>$15,000.

make buy difference purchase price ($2.70*50,000) nil 135,000 (135,000) direct material (0.50*50000) 25,000 nil 25,000 direct labour (0.70*50,000) 35,000 nil 35,000 variable overhead (0.30*50,000) 15,000 nil 15,000 fixed overhead ($2*50,000*45% relevant) 45,000 nil 45,000 tota cost 120,000 135,000 (15,000)

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