Review 7-2

Rubble Company must decide whether to make or buy some of its components. The costs of producing 66,000 switches for its generators are as follows.

Direct materials		$30,830		Variable overhead		$45,150
Direct labor		$37,140		Fixed overhead		$79,600

Instead of making the switches at an average cost of $2.92 ($192,720 66,000), the company has an opportunity to buy the switches at $2.68 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.