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Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials $54.00
Direct labor 35.00
Variable overhead 40.00
Fixed overhead 34.00
Total $163.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?

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Answer:

If the company buys the units, income will decrease by $1,000.-

Explanation:

Giving the following information:

Direct materials $54.00

Direct labor 35.00

Variable overhead 40.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal.

First, we need to determine the total cost of making the units:

Total cost= total variable costs + avoidable fixed costs

Total costs= (54 + 35 + 40)*6,000 + 89,000= $863,000

Now, the cost of buying:

Total cost= 6,000*144= $864,000

If the company buys the units, income will decrease by $1,000.-

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