Green Manufacturing makes 30,000 units per year of a part used in the manufacture of its new camcorder.An outside supplier has offered to sell Green all of these parts for $48 a unit.If the parts were purchased from the supplier,all of the direct labor costs would be avoided as well as $5 of manufacturing overhead costs per unit.Product cost information for the part under review follows: How much of the unit product cost is relevant in the decision of whether to make or buy the part?
A) $15.
B) $25.
C) $40.
D) $45.

Question

Green Manufacturing makes 30,000 units per year of a part used in the manufacture of its new camcorder.An outside supplier has offered to sell Green all of these parts for $48 a unit.If the parts were purchased from the supplier,all of the direct labor costs would be avoided as well as $5 of manufacturing overhead costs per unit.Product cost information for the part under review follows:  How much of the unit product cost is relevant in the decision of whether to make or buy the part?
A) $15. 
B) $25. 
C) $40. 
D) $45.

Quizplus · Accepted Answer

The unit product cost relevant in the decision of whether to make or buy the part is the variable cost, which includes the direct materials and direct labor costs. The total variable cost per unit is $20 ($10 direct materials + $10 direct labor). Therefore, the cost savings per unit from buying from the supplier is $23 ($48 purchase price - $20 variable cost - $5 manufacturing overhead saved). The fixed overhead costs, which are not relevant in this decision, are $25 per unit. Therefore, the best choice is to buy the part from the supplier, as the cost savings (per unit) of $23 is greater than the fixed overhead costs (per unit) of $25.

Green Manufacturing Makes 30,000 Units Per Year of a Part