A Company manufactures bags. The Company has received a proposa to buy the one o

Question

A Company manufactures bags. The Company has received a proposa to buy the one of the components used to make the bags at a price of $84,000 for 30,000 units. The Company is currently making these components in its own warehouse. The following costs are for producing 30,000 units:
DM     $32,000
DL         $28,000
MOH      $27,000
The MOH consists of $6,000 of unavoidable costs if the components are no longer produced. Should the Company make or buy the components for the bags?

A) Buy because the incremental savings is $3,000.

B) Buy because the incremental savings is $18,000

C) Make because the incremental cost of buying is $3,000.

D) Make because incremental sales is $3,000.

C) Make because the incremental cost of buying is $3,000.

Explanation / Answer

Current Cost if company produces in its own warehouse = DM +DL + avoidable MOH + Unavoidable MOH

= 32000 + 28000 + 21000 + 6000

= 87000

Cost if company purchases the order = Purchase cost + unavoidable Cost

= 84000 + 6000

= 90000

So the company should make the components because company will save $3000 if it make it in its own warehouse . So the answer is C) .

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