3. Make or Buy Omark Corporation currently manufactures a sub-assembly for its m

Question

3. Make or Buy Omark Corporation currently manufactures a sub-assembly for its main product. The manufacturing costs for the sub-assembly PER UNIT are as follows: Direct materials Direct labor Variable overhead Fixed overhead $2.00 20.00 10.00 16.00 Total Reliance Corporation has contacted Omark with an offer to sell Omark the sub-assemblies for $44 each. $50,000 of total fixed overhead costs can be eliminated if the sub-assemblies are purchased from Reliance. Omark produces 5,000 sub-assemblies each period. Should Omark continue to make the sub-assemblies themselves or should they purchase the sub-assemblies from Reliance Corporation? Why?

Explanation / Answer

Per unit Total Make Buy Make Buy Direct materials 2 10000 Direct labor 20 100000 Variable overhead 10 50000 Fixed overhead 55000 Purchases cost 44 220000 Total cost 215000 220000 Omark should continue to make the sub-assemblies as it results in cost savings of $5000(220000-215000)

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