(TCO H) McMullen Co. uses 10,000 units of Part X each year as a component in the
ID: 2472247 • Letter: #
Question
(TCO H) McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows.
Direct materials
$40,000
Direct labor
30,000
Variable manufacturing overhead
25,000
Fixed manufacturing overhead
30,000
Total costs
$125,000
An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.
Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Please state clearly whether the part should be made or bought and share your work.
Direct materials
$40,000
Direct labor
30,000
Variable manufacturing overhead
25,000
Fixed manufacturing overhead
30,000
Total costs
$125,000
Explanation / Answer
Since cost to Manufacture is more then cost of buying, it is advised to buy this part from outside supplier.
McMullen Co. Make-or-buy analysis Cost to Manufacture Cost to buy Difference Direct Material $40,000 $40,000 Direct Labor $30,000 $30,000 Variable Manufacturing Overhead $25,000 $25,000 Fixed manufacturing overhead $30,000 $20,000 $10,000 Cost of Buying $1,00,000 -$1,00,000 Total Costs $1,25,000 $1,20,000 $5,000Since cost to Manufacture is more then cost of buying, it is advised to buy this part from outside supplier.
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