Precious Little Company needs 13,000 units of a certain part to be used in produ

Question

Precious Little Company needs 13,000 units of a certain part to be used in production. If Precious Little buys the part from Sullivan Company instead of making the part itself, Precious Little could not use its present facilities for another manufacturing activity. Sixty percent of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:

A. In deciding whether to make or buy the part, what are Precious Little's total relevant costs to make the part? If required, round your intermediate and final answer to two decimal places.
B. Which alternative (make or buy) is more desirable for Precious Little and by what amount? If required, round your interim answer to two decimal places and final answer to nearest whole dollar.

Cost to make the part: Direct materials $8 Direct labor 26 Variable overhead 13 Fixed overhead applied 16 $63 Cost to buy the part: $58

Explanation / Answer

All variable cost is a relevant cost as it is incurred only when units are produced .Fixed cost is irrelevant However those fixed cost that can be avoided if manufacturing is not undertaken ,Is relevant.

b)Cost to make - 53.4

cost to buy = 58

So It is better to manufacture product inhouse as total cost per unit is lower in manufacturing by (58-53.4)= $ 4.6 per unit or (4.6*13000) = $59800 .

Direct material 8 Direct labor 26 Variable overhead 13 Fixed overhead   (16*.40)   only 40% is relevant 6.40 Total cost 53.40per unit

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