Sherman Machine Corporation incurs the following estimated annual costs in makin

Question

Sherman Machine Corporation incurs the following estimated annual costs in making a

       subassembly for one of its products:

                                                                        Total Cost for

                                                                        30,000 units       Unit Cost

            Factory Overhead:

            Variable                                              $ 510,000              $17

            Fixed                                                  $ 960,000              $32

            Direct Labor                                       $ 900,000              $30

            Direct Materials                                 $ 750,000              $25

Another manufacturer offers to sell Sherman Machine the same subassembly for $125 per

unit for 30,000 units per year. Determine whether Sherman Machine should make or buy the subassembly, assuming that the plant capacity now used to make the subassembly would

become idle if they were purchased and that $250,000 of the fixed factory overhead could be avoided by not making the subassembly.

Explanation / Answer

Solution:-

Benefit if manufacture in house = 1,340,000

Sherman Machine should make the subassembly due to Least cost of 1,340,000.

Please Rate or comment if you have any doubt regarding this solution.

Statement of comperative cost Manufacturing Purchase Direct material (25 * 30,000) 750,000 Purchase cost (125 * 30,000) 3,750,000 Direct labor (30 * 30,000) 900,000 Variable factory overhead (17 * 30,000) 510,000 Avoidable factory fixed overhead (250,000/30,000) 250,000 Total 2,410,000 3,750,000

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