Make-or-Buy, Traditional Analysis Wehner Company is currently manufacturing Part

Question

Make-or-Buy, Traditional Analysis Wehner Company is currently manufacturing Part ABS-43, producing 55,000 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows: Direct materials Direct labor Variable overhead Fixed overhead $45.60 9.80 2.75 3.90 $62.05 Total Of the total fixed overhead assigned to ABS-43, 15,400 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS- 43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $58. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred. Required: 1. Should Wehner Company make or buy Part ABS-43? Wehner should buy the part. This will produce total cost savings of 2. What is the maximum amount per unit that Wehner would be willing to pay to an outside supplier? Round your answer to the nearest cent. per unit

Explanation / Answer

Req 1: Incremental cost analysis: Make Buy Net Income increase/ (decrease) Variable cost of manufacturing Material 2508000 2508000 labour 539000 539000 Overheads-Variable 151250 151250 Fixed Cost-Lease payment 15400 15400 Cost of supplier 0 3190000 -3,190,000 Differntial cost 3213650 3,190,000 23650 Whener should should buy. This will produce the total cost saving of $23650 Maximum amount which the wehner is wiling to pay: Price already paying 58 Add: Additional s aving pr unit (23650/55000) 0.43 Maximum price 58.43

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