Question

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:
Direct Materials $4.00
Direct Labor $4.00
Variable manufacturing overhead $3.00
Fixed manufacturing overhead $1.00
Total Cost $12.00

The fixed overhead costs are unavoidable.

Assume Cruise Company can purchase 6300 units of the part from Suri Company for $14.20 each, and the facilities currently used to make the part could be used to manufacture 6300 units of another product that would have an $13 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?

Answer 1

Answer and Explanation:

Here we choose between the making and buying decision

The making cost is

= Direct material per unit + direct labor per unit + variable manufacturing overhead per unit

= $4 + $4 + $3

= $11

And, the buying cost is $14.20

So Cruise company should make the part and save the $3.20 cost i.e. come from

= $14.20 - $11

= $3.20