MAKE OR BUY

Makebuy Company has 15,000 hours of idle capacity. They need 20,000 units of a component part

used in its product lines. It is estimated that each unit will take one-half machine hour for production.

The following information is available.

Cost to make the parts:

Materials14

Direct labor18

Factory overhead (75% of direct labor cost per unit)

Variable factory overhead (40% of factory overhead per unit)

Cost to buy the parts per unit from the supplier45

If Makebuy Company buys the parts rather than producing them, it will save 60% of fixed

overhead cost per unit.

REQUIRED:

1. Determine the relevant unit costs.

2. Determine the relevant total costs and differential costs.

3. Should Makebuy Company manufacture the parts, or should it buy them from the outside

supplier?

SELL OR PROCESS FURTHER

Selpro Company uses a joint process to produce Products A, B, and C. Joint production costs for

2008 were P200,000 and are allocated using the relative-sales-value at split-off method.

Each product may be sold at its split-off point or processed further. Additional processing costs

are entirely variable. Relevant data are given below:

Product

Sales Value at Split-off

Additional Processing Costs

Final Sales Value

A

100,000

40,000

200,000

B

200,000

50,000

240,000

C

40,000

60,000

80,000

340,000

150,000

520,000

REQUIRED:

1. To maximize profit, which product or products should be sold at split-off point and which

product or products should be processed further?

2. If the alternative were either to sell at split-off point or to process further all the products, which

alternative would you recommend?