em 2. The Crown Company must decide whether to make or buy part 128PC. Although

Question

em 2. The Crown Company must decide whether to make or buy part 128PC. Although Crown's idle equipment could be used to produce up to 10,000 units of the part, the company presently needs only 7.000 units. The following shows the estimated cost of making part 128PC. Allocated general manufacturing overhead Depreciation on existing equipment Annual additional set-up and maintenance costs $50,000 15,000 20,000 85,000 Total fixed costs Direct materials Direct labor Variable overhead S5 Total variable manufacturing costs S15per unit Reuten Company will sll part 128PC to the Crown Company for $20 per unit. If Crown Company bu annual additional set-up and maintenance costs can be avoided Required: Determine whether Crown should make or buy the part, and explain why. Show your working steps.

Explanation / Answer

Solution :-

1).

The Company Should Make the Part 128 PC.

Explanation :-

- Depreciation on Existing equipment is irrelevant cost as it will comtinue to incur irrespective of which ever decision

is finalised.

- Allocated general Manufacturing OH is unavoidable cost.

- Annual Additional set up and maintenance costs will also continue to occur and therefore irrelevant while making

decision.

2).

a).

b). Net Present Value = Present Value of Cash Flow - Investment cost

= $43236 - $45000

= -$1764

Make Buy Differential Purchase Price 20 20 Direct Material 5 5 Direct Labor 6 6 Variable Factory overhead 4 4 Fixed Factory Overhead - - Total Cost 15 20 5

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