Teich Inc. is considering whether to continue to make a component or to buy it f
ID: 2497086 • Letter: T
Question
Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component is given as follows:
Direct materials ............................................... $7.90
Direct labor...................................................... 2.10
Variable manufacturing overhead .................. 1.10
Fixed manufacturing overhead ....................... 4.00
Unit product cost ...........................................$15.10
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. In addition, if the components are purchased the facilities that are being used to make the component can be leased to another company for $30,000 per year. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?
A) $13.50
B) $11.50
C) $16.10
D) $15.10
Explanation / Answer
A) $13.50 Statement showing computation of Cost Particulars Amount 15,000 Units Amount per Unit Direct Materials 118,500.00 7.90 Direct Labour 31,500.00 2.10 Variable Manufacturing Overhead 16,500.00 1.10 Fixed Manu O/H - 10% since it is avoidable 6,000.00 0.40 Oppurtunity Cost 30,000.00 2.00 Total Cost 202,500.00 13.50 So we should compare cost of $13.50 per unit when we decide whether to make or buy
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