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A manufacturing company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 20,000 If the manufacturing company can purchase the component externally for $190,000 and $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision

Respuesta :

Answer: See explanation

Explanation:

Based on the information given, the relevant cost to make will be:

Direct Materials = $120,000

Add: Direct Labor = $25,000

Add: Variable Overhead = $45,000

Add: Fixed Overhead = $5,000

Relevant cost to make = $195,000

The relevant cost to buy is $190,000.

Therefore, the cost to buy is less as there'll be a net operating Income increase of $5000.

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