BLUE Company
BLUE Company needs 10,000 units of a certain part to be used in production.If BLUE buys the part from RED Company instead of making it,BLUE could not use the present facilities for another manufacturing activity.Sixty percent (60%)of the fixed overhead applied will continue regardless of what decision is made.
The following quantitative information is available regarding the situation presented:

Refer to BLUE Company.In deciding whether to make or buy the part,BLUE' s total relevant cost to make the part is
A)$352,000.
B)$490,000.
C)$540,000.
D)$580,000.

Question

BLUE Company
BLUE Company needs 10,000 units of a certain part to be used in production.If BLUE buys the part from RED Company instead of making it,BLUE could not use the present facilities for another manufacturing activity.Sixty percent (60%)of the fixed overhead applied will continue regardless of what decision is made.
The following quantitative information is available regarding the situation presented:

Refer to BLUE Company.In deciding whether to make or buy the part,BLUE' s total relevant cost to make the part is
A)$352,000. 
B)$490,000. 
C)$540,000. 
D)$580,000.

Quizplus · Accepted Answer

Total relevant cost to make the part:
Direct materials = $200,000
Direct labor = $100,000
Variable overhead = $80,000
Fixed overhead (40% that will be avoided) = $120,000
Total relevant cost = $500,000

Total cost to buy the part:
Purchase cost per unit = $50
Total cost to purchase 10,000 units = $500,000

Since the total relevant cost to make the part is higher than the total cost to buy the part, it is more cost-effective for BLUE Company to buy the part from RED Company. Therefore, the best choice is to buy, and BLUE Company should choose option B.

BLUE Company BLUE Company Needs 10,000 Units of a Certain Part to Part