Question

Agler Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $ 1 Direct labor 10 Variable overhead 5 Fixed overhead 8 Total $ 24 Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for $17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated to other products. Should Agler make or buy the subassemblies?

Answer 1

It should buy the subassemblies

as it generates a 4,000 cost savings.

Step-by-step explanation:

DM 1

DL 10

VFO 5

FO 8

total 24

make cost:

4,000 x 24 = 96,000

buy cost:

4,000 x 17 = 68,000

fixed cost:

8 per unit - 2 allocated in other product: 6 per unit

4,000 x 6 = 24,000

Total cost 92,000

Current cost - alternative cost:

96,000 - 92,000 = 4,000 COST SAVINGS