Question

g Swifty Corporation, Inc. can produce 100 units of a component part with the following costs: Direct Materials $19000 Direct Labor 3500 Variable Overhead 17000 Fixed Overhead 11000 If Swifty Corporation can purchase the component part externally for $44000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Answer 1

Answer:

Swift Corporation should make the components

Explanation:

For a make or buy decision the relevant cash flows include  

1. the differential variable of the two options  

2. savings from avoidable fixed costs associated with internal production  

Variable cost of producing                                          $

(19,000 + 3500 + 17,000)                                        39,500

External purchase cost                                           44,000

Extra variable cost of external purchase                4,500

Savings in fixed cost                                                (4,000)

Net extra ccost of external purchase                       500

Decision:

Making the components internally would save the Swift Corporation

$500

Swift Corporation should make the components