Unifying Concepts: Make-or-Buy Decisions (Differential Costs and Opportunity Costs)

Snow Corporation manufactures commercial freezers for use in restaurant kitchens. The company is planning to produce a new freezer suitable for large hotel kitchens. These smaller freezers require a component that Snow Corporation can either make or buy from a subcontractor. The subcontractor will sell the part for $29. The costs for making 18,000 units of the part are as follows:

If the part is produced, Snow Corporation will use an idle machine it already owns. If the part is bought, the company plans to rent the machine and the factory space to another company for $8,000 and $14,000 a year, respectively.
Snow expects that, if the part is produced, the company will be able to schedule production so that no warehouse space will be needed. However, if the part is bought, Snow will need to use warehouse space, for which it will have to pay $2,000 a year in rent.
Required:
1. Identify any opportunity costs relevant to the decision to make or buy the component.
2. Determine the differential costs of making the product.
3. Determine the differential costs of buying the product.
4. Interpretive Question: Would you recommend that Snow make or buy the component? Why?

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Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $12 per unit $9 per unit $6 per unit $60,000* *The $60,000 fixed manufacturing overhead includes $24,000 of indirect fixed costs allocated to the part and $36,000 for a production manager.