Make-or-Buy Decision, Alternatives, Relevant Costs

Each year, Giada Company produces 23,000 units of a component part used in tablet computers. An outside supplier has offered to supply the part for $1.33. The unit cost is:

Direct materials $0.78

Direct labor 0.29

Variable overhead 0.14

Fixed overhead 2.65

Total unit cost $3.86

Required:

1. What are the alternatives for Giada Company?

Make the part in house Buy the part externally Make the part in house or buy the part externally None

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

Direct materials, direct labor, and variable and fixed overhead

Direct materials, direct labor, and variable overhead

Direct materials, direct labor, and fixed overhead

None

List the relevant cost(s) of external purchase.

Purchase price

Sales price

Material price

None

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

by:

Make the part in house

Buying the part from the external supplier

$______________

4. What if $19,400 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?

by:

Make the part in house

Buying the part from the external supplier

$___________