Answer:
It is more convenient to make the component.
Explanation:
Giving the following information:
Direct materials $1.00
Direct labor 10.00
Variable manufacturing overhead 5.00
Total unitary variable cost= $16
Total fixed overhead= 8*10,000= $80,000
Proposal= 10,000 units for $22
If Cierra accepts the proposal, $50,000 of the fixed overhead will be eliminated.
We need to calculate the total cost of both options and determine which one is better.
Make in-house:
Total cost= 10,000*16 + 50,000= $210,000
Buy:
Total cost= 10,000*22= $220,000
It is more convenient to make the component.
