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: Direct materials $12
Direct labour 20
Variable overhead 12
Average fixed overhead 10
Total $54
Which alternative is more profitable and by what amount?

Question

Quizplus · Accepted Answer

To determine the most profitable alternative, we need to calculate the total cost of each option:

Buying cost = 30,000 units x $46 = $1,380,000
Making cost = (30,000 units x $54) - (55% x $10 x 30,000 units) = $1,021,500

Therefore, by choosing to buy the component from Zigler, Growe Company would incur a cost of $1,380,000, whereas by choosing to make it, they would incur a cost of $1,021,500.

The difference between the two alternatives would be:

$1,021,500 - $1,380,000 = -$358,500

So, selecting the "Buy, $75,000" option would result in the highest profit of $75,000.

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