Question

Bonita’s Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $119000 Direct Labor 24000 Variable Overhead 53000 Fixed Overhead 30000 If Bonita’s Manufacturing Company can purchase the component externally for $195000 and only $6000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Answer 1

The correct decision is to buy the component.

Step-by-step explanation:

We need to calculate the manufacturing cost of the product and then compare it to the purchase price and the fixed cost after purchase.

Manufacturing Cost:

Direct Material $119,000

Direct Labor $24,000

Variable Overhead $53,000

Fixed Overhead $30,000

Total cost $226,000

Purchasing cost:

Purchase price $195,000

Fixed cost $6,000

Total cost $201,000

As the cost to purchase price is lower than the component manufactured, so, Bonita’s Manufacturing Company should buy this component to save cost.