Final answer:
Tex's Manufacturing Company should buy the component to save $25,000, rather than making it in-house for $215,000, because the total cost to buy it is only $190,000.
Step-by-step explanation:
To decide whether Tex's Manufacturing Company should make or buy the component, we need to compare the total costs of making the component in-house to the cost of purchasing it externally. The total cost of making includes direct materials, direct labor, variable overhead, and fixed overhead costs. However, only a portion of the fixed overhead can be avoided if the company decides to buy the component.
The total make cost is the sum of direct materials ($120,000), direct labor ($25,000), and variable overhead ($45,000), which equals $190,000. Since only $5,000 of the fixed overhead can be avoided, the fixed costs that must still be considered are $30,000 - $5,000 = $25,000. To get the true cost of making the component, we add this amount to the total make cost, resulting in $190,000 + $25,000 = $215,000.
If the company buys the component externally for $190,000 instead of making it in-house for $215,000, the company will save $25,000. Therefore, the correct decision based on cost savings would be option d) Buy and save $5,000, which is a more accurate answer when comparing the buying cost to the total make cost, including the unavoidable portion of fixed overhead.