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The estimated cost of producing 200,000 units is
Direct Material 82
Direct Labor 37
Variable Factory 22
Overhead
Fixed Factory 40
Overhead
The same unit can be purchased for $166 and 40% of
The fixed factory overhead can be saved (avoided) should
The Company make or buy?
Expert Answer
If company makes the product:
Total cost of production = total variable cost + fixed factory overhead cost
Total cost of production = No. of units*(Direct material cost + direct labor cost+ variable overhead) + fixed factory overhead cost
Total cost of production = 200000*(87+37+22) + 40 = $29200040
If company buys the product:
Total cost of production (after adjustment of the saving) = 200000*166 – 40*40% = $33199984
Since, it costs relatively less when the company makes the product, so the company should take the “make” the decision to product.
