Glover Company produces a part that has the following costs per unit:
Direct material $ \$ 9 $
Directlabor 4
Variable overhead 2
$\text { Fixed overhead. }$ $\underline{6}$
Total $\underline{\$21}$

London Corporation can provide the part to Glover for $23 per unit.Glover Company has determined that 50 percent of its fixed overhead would continue if it purchased the part.However,if Glover no longer produces the part,it can rent that portion of the plant facilities for $70,000 per year.Glover Company currently produces 12,000 parts per year.Which alternative is preferable and by what margin?
A)Make-$24,000
B)Make-$60,000
C)Buy-$10,000
D)Buy-$46,000

Question

Glover Company produces a part that has the following costs per unit:
Direct material                                $ \$ 9 $
Directlabor                                        4 
Variable overhead                              2
$\text { Fixed overhead. }$                        $\underline{6}$
Total                                                $\underline{\$21}$

London Corporation can provide the part to Glover for $23 per unit.Glover Company has determined that 50 percent of its fixed overhead would continue if it purchased the part.However,if Glover no longer produces the part,it can rent that portion of the plant facilities for $70,000 per year.Glover Company currently produces 12,000 parts per year.Which alternative is preferable and by what margin?
A)Make-$24,000
B)Make-$60,000
C)Buy-$10,000
D)Buy-$46,000

Quizplus · Accepted Answer

If Glover buys the part, it will save the following costs:Direct material: $9 per unit x 12,000 units = $108,000Direct labor: $4 per unit x 12,000 units = $48,000Variable overhead: $2 per unit x 12,000 units = $24,000Fixed overhead: $6 per unit x 12,000 units = $72,000Total savings: $108,000 + $48,000 + $24,000 + $72,000 = $252,000However, Glover will incur the following costs if it buys the part:Purchase price: $23 per unit x 12,000 units = $276,000Rent: $70,000Total costs if buying: $276,000 + $70,000 = $346,000Therefore, Glover will save $252,000 - $346,000 = $10,000 by buying the part.

Glover Company Produces a Part That Has the Following Costs $9 \$ 9 $9

Glover Company Produces a Part That Has the Following Costs $\$ 9$