Company currently makes 10,000 units of a component part for one of its finished

Question

Company currently makes 10,000 units of a component part for one of its finished products with the following costs:

Direct materials = $10

Direct labor = $11

Total overhead = $8

$5 of the total overhead is allocated fixed cost and $3 is the cost of a supervisor that works only on this component. Recently, a company offered to supply this component for $26 per unit. If the offer is accepted, the supervisor will dismissed and the freed-up resources will remain idle. The company should:

a. buy and save 20,000

b. buy and save 30,000

c. make and save 20,000

d. make and save 30,000

Please show work on how to find this answer.

Explanation / Answer

make decision:

making cost of product = 11 + 10 + 3 = 24

buying cost of product = 26

savings if you make = (26 - 24) * 10000 = 20000

so option C is correct

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