Eichholtz Company uses 10,000 units of a part in its production process. The cos

Question

Eichholtz Company uses 10,000 units of a part in its production process. The costs to make a part are: direct materials, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Eichholz has received a quote of $55 from a potential supplier for this part. If Eichholtz buys the part, 70 percent of the applied fixed overhead would continue. Eichholtz Company would be better off by a) $50,000 to manufacture the part b) $150,000 to buy the part c) $40,000 to buy the part or d) $160,0000 to manufacture the part

Explanation / Answer

Cost to buy: $55/unit * 10,000 units = $550,000

Cost to manufacture: $(12+25+13+9)= $59/unit

Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000

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