Question

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it? Continue to make — $60,000 advantage. Buy — $80,000 advantage. Continue to make — $40,000 advantage. Buy — $100,000 advantage.

Answer 1

Answer:

The answer is: Continue to make — $60,000 advantage.

Explanation:

We have to compare the current total costs with the total costs of buying the parts from a supplier.

Current costs

• total variable manufacturing       $240,000
• Supervisor's salary                         $60,000
• Depreciation                                   $20,000
• Allocated fixed overhead             $140,000
• Total current cost:                        $460,000

Costs of buying the parts

• total purchase price                     $360,000
• Allocated fixed overhead             $140,000
• Depreciation                                   $20,000
• total costs for buying the parts   $520,000

Since buying the parts from a supplier is $60,000 more expensive than continue manufacturing ($520,000 - $460,000), Andrews Co. should continue as it is.