Question

In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is applied at 150% of direct labor cost per unit. The vacuums sell for $150 each. A third party has offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company make or buy the engines?

Answer 1

Answer:

Make

Explanation:

Data

Annual production = 50,000 units

Variable factory overhead = $7.5

Fixed factory overhead(150% x $2) = 3

Vacum selling price = $150

Third party offered = $60

Make or buy = ???

Solution

                                         MAKE           BUY            NET INCOME

Direct Materials(w)         900,000                                 900,000

Direct Labor(w)              1,200,000                                 1,200,000

Variable Overheads(w)  375,000                                   375,000

Fixed overheads (w)       175,000        112,500               37,500

Purchase price (w)                               3000,000         (3,000,000)

Total                         2625000      3,112,500            (487,,500)

Working

Direct Materials = 75000*12 = 900,000

Direct Labor = 100,000*12 = 1,200,000

Variable Overheads  = 50,000*7.5 = 375,000

Fixed overheads   = 50,000*3(2x150%) = 150,000

Purchase price = 50,000 x 60 = 3,000,000

Decision: The company should make the engine instead of buying it because net income is decreasing by $487,500.