6-32 Make or Buy considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume Production costs for 100,000 units of the component are as follows: $400,000 Direct materials Factory overhead Indirect labor Supplies Allocated occupancy cost Total cost $80,000 30,000 40,000 150,000 $550,000 A small, local company has offered to supply the components at a price of $4.20 each. If the division discontinued its production of the component, it would save two-thirds of the supplies cost and $30,000 of indirect-labor cost. All other overhead costs would continue. The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of $4.00 is below the $4.20 bid. 1. Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much? 2. What qualitative factors might influence the decision about whether to make or to buy the component? process for the component is a highly automated part of a just-in-time production system. All laboris E G H F Bose 400,000 80,000 30,000 40,000 150,000 550.000 100,000 4.20 20,000 30,000 B. C D 5 Data Inpu Section 6 7 Direct materials 8 Factory overhead 9 Indirect labor Supplies Allocated occupancy cost 12 Total costs 13 Production in units for coming year 14 Outside purchase price 15 Savings if purchased outside: 16 Two-thirds of the supplies cost 17 $30,000 of indirect labor cost 18 Output Section 19 Part 1 20 21 Direct materials 22 Factory overhead 23 Indirect labor 24 Supplies 25 Allocated occupancy cost 26 Total relevant costs 27 28 Difference in favor of 2 29 30 Part 2 31 Type answer starting bere 32 Make Total Per Unit Formula 1 Formula 4 Buy Per Unit Total Formula 2 Formula 3 Formula 5 Formula 6 $ Formula 7 Formula 8 Formula 9 Formula 10 34 35 36