Question

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?

Answer 1

Answer:

Make, Savings = $1,000

Explanation:

If Rubium company makes, they can avoid -

Total Variable cost = $(54 + 35 + 40)*6,000 units = $774,000

Total Fixed cost = $89,000

Therefore, total cost = $774,000 + 89,000 = 863,000

Again, if Rubium purchases from Crayola Technologies Inc., the cost will be

$144 x 6,000 units = $864,000

So, Purchasing cost is larger than making cost. Therefore, Rubium company should make the sub-assemblies.

The difference between making and purchasing is = $(864,000-$863,000 = $1,000

Therefore, savings = $1,000