Gallagher Company produces a part that has the following costs per unit:
Direct material $ \$ 8 $
Directlabor 3
Variable overhead 1
$\text { Fixed overhead. }$ $\underline{5}$
Total $\underline{\$17}$

Homeland Corporation can provide the part to Gallagher for $19 per unit.Gallagher Company has determined that 60 percent of its fixed overhead would continue if it purchased the part.However,if Gallagher no longer produces the part,it can rent that portion of the plant facilities for $60,000 per year.Gallagher Company currently produces 10,000 parts per year.Which alternative is preferable and by what margin?
A)Make-$20,000
B)Make-$50,000
C)Buy-$10,000
D)Buy-$40,000

Question

Gallagher Company produces a part that has the following costs per unit:
Direct material                                $ \$ 8 $
Directlabor                                        3 
Variable overhead                              1
$\text { Fixed overhead. }$                        $\underline{5}$
Total                                                $\underline{\$17}$

Homeland Corporation can provide the part to Gallagher for $19 per unit.Gallagher Company has determined that 60 percent of its fixed overhead would continue if it purchased the part.However,if Gallagher no longer produces the part,it can rent that portion of the plant facilities for $60,000 per year.Gallagher Company currently produces 10,000 parts per year.Which alternative is preferable and by what margin?
A)Make-$20,000
B)Make-$50,000
C)Buy-$10,000
D)Buy-$40,000

Quizplus · Accepted Answer

If Gallagher buys the part, it will save the following costs:Direct material: $8 per unit x 10,000 units = $80,000Direct labor: $3 per unit x 10,000 units = $30,000Variable overhead: $1 per unit x 10,000 units = $10,000Fixed overhead: 40% of $5 per unit x 10,000 units = $20,000Total savings: $80,000 + $30,000 + $10,000 + $20,000 = $140,000If Gallagher makes the part, it will incur the following costs:Direct material: $8 per unit x 10,000 units = $80,000Direct labor: $3 per unit x 10,000 units = $30,000Variable overhead: $1 per unit x 10,000 units = $10,000Fixed overhead: $5 per unit x 10,000 units = $50,000Total costs: $80,000 + $30,000 + $10,000 + $50,000 = $170,000Therefore, Gallagher will save $140,000 - $170,000 = $30,000 by buying the part.

Gallagher Company Produces a Part That Has the Following Costs $8 \$ 8 $8

Gallagher Company Produces a Part That Has the Following Costs $\$ 8$