The decision to make or buy a component is similar to the special order decision. Managers should select the lowest cost alternative.

Capacity Issue:

1. Excess capacity: is there is excess capacity the cost of making the product internally is the cost that will be avoided or saved of the product is not made. This will be the maximum outside purchase price.
2. No Excess Capacity: If there is no excess capacity, the cost of making the product internally is the cost that will be avoided or saved if the product is not made PLUS the opportunity cost associated with the decision.

Offset Manufacturing produces 20,000 units of part No. 125. The production costs are:

Total Costs Cost per unit

Direct Materials $ 10,000.00 $ 0.50

Direct Labor $ 40,000.00 $ 2.00

Variable Manufacturing Overhead $ 20,000.00 $ 1.00

Fixed Factory Overhead $ 40,000.00 $ 2.00

Total Costs $ 110,000.00 $ 5.50

An outside manufacturer approaches Offset manufacturing and offers to sell is the same part for $5 per unit. Offset has excess capacity. The $10,000 factory floor supervisor's salary is the only fixed cost that will be eliminated if Offset purchases the part.

Determine whether Offset Manufacturing should make or buy the part.

Please fill in the chart below on your own and explain your management decision. 1-2 pages including chart. (Not all point on chart below will be necessary to fill in to form a decision.)

MAKE BUY

TOTAL PER UNIT TOTAL PER UNIT

Purchase Cost

Direct materials

Direct Labor

VFOH

FFOH

Total Relevant Costs

Difference

Offset will choose to ___________ because _____________.