Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 120,000 \
\text { Direct Labor } & 25,000 \
\text { Variable Overhead } & 45,000 \
\text { Fixed Overhead } & 30,000
\end{array}$$ If Tex's Manufacturing Company can purchase the component externally for $190000 and only $5000 of the fixed costs can be avoided what is the correct make-or-buy decision?

Question

Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 120,000 \
\text { Direct Labor } & 25,000 \
\text { Variable Overhead } & 45,000 \
\text { Fixed Overhead } & 30,000
\end{array}$$ If Tex's Manufacturing Company can purchase the component externally for $190000 and only $5000 of the fixed costs can be avoided what is the correct make-or-buy decision?

Quizplus · Accepted Answer

The relevant costs are:Make: $120,000 + $25,000 + $45,000 + $30,000 = $220,000Buy: $190,000 + $5,000 = $195,000Therefore, Tex's Manufacturing Company should buy the component externally and save $5,000.

Tex's Manufacturing Company Can Make 100 Units of a Necessary