Bell Company must decide whether to make or buy subassembly XYZ. Bell Company ne

Question

Bell Company must decide whether to make or buy subassembly XYZ. Bell Company needs 10,000 units of subassembly XYZ. A cost analyst has prepared the following estimates on making the subassembly: Direct materials costs $4 per unit Direct labor costs 6 per unit Variable overhead costs 6 per unit Total variable costs $16 per unit Additional setup and maintenance costs $30,000 Allocated fixed factory overhead 60,000 Total fixed costs $90,000 per year Tracy Manufacturing LLC is willing to sell Bell Company the subassembly for $20 per unit. Required: Should Bell Company make or buy the subassembly

Explanation / Answer

Note: Here I assume that The fixed overhead costs are unavoidable and it is not relavant for decision making

Variable cost= Direct materials costs per unit+ Direct labor costs per unit +Variable overhead costs

Variable cost=$4+$6+6=$16

Incremental cost savings from not making component (10,000 x $16)=$160,000

Incremental cost of buying component from LLC (10,000 x $20) =(2,00,000)

Incremental decrease in net income due to buying component =$(40,000)

Conclusion: Bell company better to Make the Subassemly units

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