Question

Teich inc. is considering whether to continue to make a component or to buy it from an outside supplier. the company uses 15,000 of the components each year. the unit product cost of the component is given as follows: direct materials ............................................... $ 7.90 direct labor...................................................... 2.10 variable manufacturing overhead .................. 1.10 fixed manufacturing overhead ....................... 4.00 unit product cost ............................................ $15.10 assume that direct labor is a variable cost. of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. in addition, if the components are purchased the facilities that are being used to make the component can be leased to another company for $30,000 per year. when deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component

Answer 1

The  cost of making that the component should be compared to the price of buying the component is $15.55.

What is cost of making?

First step

Relevant manufacturing cost

Direct materials $7.90

Direct labor 2.10

Variable manufacturing overhead 1.10

Fixed manufacturing overhead 0.4

(10% × $4.00 is avoidable)

Total $11.50

Second step

Cost of making=11.5+[($8.10 per unit ÷ 6 minutes per unit)×3 minutes]

Cost of making=$11.5+$4.07

Cost of making=$15.55

Therefore the  cost of making that the component should be compared to the price of buying the component is $15.55.

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