Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision is made. The following information is available: Cost to Kingston to make the part: In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:

Question

Kingston Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Kingston buys the part from Utica Company, Kingston could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision is made. The following information is available: Cost to Kingston to make the part:  In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:

Quizplus · Accepted Answer

To determine whether it's more cost-effective to make or buy the part, we need to consider the relevant costs of each option.

If Kingston makes the part, the relevant costs are: 
- Direct materials: $60,000 (10,000 units * $6 per unit) 
- Direct labor: $150,000 (10,000 units * $15 per unit) 
- Variable overhead: $60,000 (10,000 units * $6 per unit) 
- Fixed overhead: $240,000 (60% of $400,000)

Total relevant costs to make the part: $510,000

If Kingston buys the part from Utica Company, the relevant costs are: 
- Purchase price: $110,000 (10,000 units * $11 per unit) 
- Fixed overhead: $240,000 (60% of $400,000)

Total relevant costs to buy the part: $350,000

Therefore, it's more cost-effective for Kingston to buy the part from Utica Company for a total relevant cost of $480,000 (($110,000 + $240,000) * 1.6).

Kingston Company, Which Needs 10,000 Units of a Certain Part