Question

Waterway Industries can produce 100 units of a component part with the following costs: Direct Materials $15800 Direct Labor 6900 Variable Overhead 16800 Fixed Overhead 12000 If Waterway Industries can purchase the component part externally for $47100 and only $4100 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Answer 1

Answer:

If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.

Explanation:

current production costs:

direct materials $15,800

Direct labor $6,900

Variable overhead $16,800

Fixed overhead $12,000

total costs = $51,500

if the company can purchase the 100 units form an outside vendor for $47,100 and avoid $4,100, its total costs would be:

purchase price $47,000

fixed overhead = $12,000 - $4,100 = $7,900

total costs = $54,900

If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.