Drapers Corporation, a high-end digital camera manufacturer, currently purchases

Question

Drapers Corporation, a high-end digital camera manufacturer, currently purchases a component part from an outside company at a price of $141 per unit. While the quality of the component has always been very high, Drapers Corporation’s management believes it might be possible to produce a superior component internally at a cost lower than $141. The accounting department has provided an estimate of the per-unit manufacturing cost of the component.

The company’s controller believes that the estimate may be incorrect, because Drapers Corporation has excess manufacturing capacity to produce the components without incurring additional fixed factory overhead. What per-unit manufacturing cost should be used in determining whether Drapers Corporation should purchase the components from an outside company or manufacture them internally?
$_______

Complete the table below to compare the per-unit cost for Drapers Corporation to make the component and the per-unit cost to buy the component. If an amount is zero, enter "0".

Based on your analysis, it is better for Drapers Corporation to buy the component. Doing so will save the company $____ per unit.

Direct materials 77 Direct labor 45 Variable factory overhead 25 Fixed factory overhead 30 $177

Explanation / Answer

1)Manufacturing cost =Direct material +Direct labor +variable overhead

                                = 77 +45 +25

                                = $ 147 per unit

2)

**Save the comany $ 6 per unit

make Buy Differential cost DM 77 0 77 DL 45 0 45 Factory OH 25 0 25 Purchase cost 0 141 -141 Total relevant cost 147 141 6

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