Topic: Relevant Costing

Magnus Tech Company manufactures a particular computer component. Currently, the costs per unit are as follows:

Direct materials - P 50

Direct labor - P 500

Variable overhead - P 250

Fixed overhead - P 400.

Anish Inc. has obtained Magnus with an offer to sell 10,000 units of the component for P 1,100 per unit. If Magnus accepts the proposal, P 2,500,000 of the fixed overhead will be eliminated. Should Magnus make or buy the component?

a. Make due to savings of P 3,000,000

b. Buy due to savings of P 2,500,000

c. Buy due to savings of P 1,000,000

d. Make due to savings of P 500,000

Show solution