Collins Company uses 12,000 units of a part in its production process.The costs to make a part are: direct material,$15;direct labor,$27;variable overhead,$15;and applied fixed overhead,$32.Eichholtz has received a quote of $60 from a potential supplier for this part.If Collins buys the part,75 percent of the applied fixed overhead would continue.Collins Company would be better off by
A)$30,000 to manufacture the part.
B)$348,000 to buy the part.
C)$60,000 to buy the part.
D)$216,000 to manufacture the part.

Question

Quizplus · Accepted Answer

To determine if it's better for Collins Company to make or buy the part, we need to calculate the total cost for each option.

Make:
Direct material + direct labor + variable overhead + applied fixed overhead = $15 + $27 + $15 + $32 = $89 per unit
Total cost to make = $89 × 12,000 = $1,068,000

Buy:
Cost from potential supplier = $60 per unit
75% of applied fixed overhead = $32 × 0.75 = $24 per unit
Total cost to buy = $60 + $24 = $84 per unit
Total cost to buy = $84 × 12,000 = $1,008,000

Therefore, it's better for Collins Company to buy the part as it would save them $60,000 ($1,068,000 - $1,008,000) in total costs.

Collins Company Uses 12,000 Units of a Part in Its