The management of Garvin Industries is evaluating whether the company should con

Question

The management of Garvin Industries is evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. Based upon its accounting records, it appears that it costs the company $80 per unit to make the component. The $80 cost per component was determined as follows: Direct Materials $16 Direct Labor 30 Variable manufacturing overhead $12 Fixed manufacturing overhead 22 Unit Cost 80 Garvin industries uses 10,000 components per year. After Stison, Inc. submitted a bid of $70 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. Should Garvin Industries make or buy the component?
Include supporting calculations The management of Garvin Industries is evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. Based upon its accounting records, it appears that it costs the company $80 per unit to make the component. The $80 cost per component was determined as follows: Direct Materials $16 Direct Labor 30 Variable manufacturing overhead $12 Fixed manufacturing overhead 22 Unit Cost 80 Garvin industries uses 10,000 components per year. After Stison, Inc. submitted a bid of $70 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. Should Garvin Industries make or buy the component?
Include supporting calculations

Explanation / Answer

Relevant cost :

Garvin industries should make the component

Make Buy Direct material 160000 Direct labour 300000 Variable overhead 120000 Purchase cost 700000 Total relevant cost 580000 700000

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