Your business manufactures wearable technology (think Fitbit). Each wearable ite

Question

Your business manufactures wearable technology (think Fitbit). Each wearable item requires a pulse monitor, which you can either make yourself or which can be purchased from an outside supplier for $65 per monitor. Currently you are making the 2,000 monitors you need with the following costs:

Direct Materials

$40,000

Direct Labor

50,000

Variable Overhead

35,000

Fixed Overhead

45,000

                If you choose to buy the monitors, you will eliminate $28,000 of the variable overhead and $5,000 of the fixed overhead.

Should you make or buy the pulse monitors, assuming there is no use for the freed-up manufacturing capacity?

Should you make or buy the monitors if you can use the freed-up manufacturing capacity to add custom graphics to your wearable items? This addition would increase the contribution margin on the wear able items by $12,000 in total?   

Direct Materials

$40,000

Direct Labor

50,000

Variable Overhead

35,000

Fixed Overhead

45,000

Explanation / Answer

a freed-up manufacturing capacity not usable Make Buy Direct Materials $40,000.00 0 Direct Labor $50,000.00 0 Variable Overhead $35,000.00 $7,000.00 fixed overhead $45,000.00 $40,000.00 purchase cost $0.00 130000 Total $170,000.00 $177,000.00 Decision: Make as it will save $ 7000 b freed-up manufacturing capacity usable Make Buy Direct Materials $40,000.00 0 Direct Labor $50,000.00 0 Variable Overhead $35,000.00 $7,000.00 fixed overhead $45,000.00 $40,000.00 purchase cost $0.00 130000 Total $170,000.00 $177,000.00 Less:contribution earned $0.00 12000 net cost $170,000.00 $165,000.00 Decision: Buy as it will save $ 5000

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