Make-or-Buy Decision, Alternatives, Relevant Costs

Each year, Giada Company produces 21,000 units of a component part used in tablet computers. An outside supplier has offered to supply the part for $1.34. The unit cost is:

Direct materials $0.84

Direct labor 0.31

Variable overhead 0.13

Fixed overhead 2.70

Total unit cost $3.98

Required:

1. What are the alternatives for Giada Company?

Make the part in house or buy the part externally

2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production.

Direct materials, direct labor and variable overhead

List the relevant cost(s) of external purchase.

Purchase price

3. Which alternative is more cost effective and by how much?

Making the part in house

by $fill in the blank 5

4. What if $20,280 of fixed overhead is rental of equipment used only in production of the component that can be avoided if the component is purchased? Which alternative is more cost effective and by how much?

Buying the part from the external supplier

by $fill in the blank 7

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