Growe Company manufactures sewing machines and requires 30,000 units of a component that is used in the manufacturing process. If Growe buys the part from Zigler Brothers, the plant will be idle. Of the fixed, 55% overhead will continue regardless of the decision. The cost to buy the part from Zigler is $46. The unit cost to make the part is: Which alternative is more profitable and by what amount?

Question

Quizplus · Accepted Answer

To determine the most profitable choice, we need to calculate the total cost for each alternative. 
If we buy the part from Zigler Brothers, the cost will be: 
30,000 units x $46 = $1,380,000

If we make the part, the variable cost will be added on top of the 55% fixed overhead that will continue regardless of the decision. Assuming the variable cost to make the part is $30, the total cost to make 30,000 units is: 
(30,000 units x $30) + (55% x $30 x 30,000 units) = $1,095,000

Comparing the two options, it is more profitable to make the part since the cost is lower at $1,095,000. However, it would only save $285,000 compared to buying the part, which is not a significant amount considering it would idle the plant. Therefore, the best choice is to buy the part from Zigler Brothers.

Growe Company Manufactures Sewing Machines and Requires 30,000 Units of a Component