2. Make or Buy Decision Part 9A is used in one of Dell\'s products. The company

ID: 2601386 • Letter: 2

Question

2. Make or Buy Decision Part 9A is used in one of Dell's products. The company makes 6,000 units of this part each year. The company's Accounting Department reports the following costs of producing the 9 part at this level of activity: Per Unit 1.40 $2.40 $7.20 3.60 S8.90 Variable manufacturing overhead. Supervisor's salary.. Depreciation of special equipment Allocated general overhead. An outside supplier has offered to produce this part and sell it to the company for $16.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. Should outsi de supplier's offer be accepted? Please show all the computations. (14 points)

Explanation / Answer

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Make

Buy

Direct Material

$ 8,400.00

Direct labor

$ 14,400.00

Variable manufacturing overhead

$ 43,200.00

Supervisor's salary

$ 21,600.00

Depreciation of special equipment

$ 53,400.00

Allocated general overhead

$ 27,000.00

$ 21,000.00

Cost for buying

$ 96,600.00

Total cost for 6,000 units

$ 168,000.00

$ 171,000.00

Outside offer should not be accepted as it increased the cost

Unavoidable Allocated general overhead in case buying = ($ 4.50 x 6,000) - $ 6,000

= $ 27,000 - $ 6,000 = $ 21,000