Question

Ferro, Inc., an automobile manufacturing company, produces 150,000 units of steel wheels used in its automobiles each year. An outside supplier has offered to supply steel wheels for $35 each. The unit cost of manufacturing the steel wheels is: Direct materials $13.00 Direct labor 12.00 Variable overhead (power) 11.00 Fixed overhead 5.00 Total unit cost $41.00

Answer 1

See below.

Step-by-step explanation:

This is a make or buy decision that the company has to make.

We assume that the fixed overheads are not relevant - that is they are non incremental and would have to be purchased regardless of the company buying or making steel wheels.

We compare the costs as,

Cost of buying = $35

Cost of making = Direct material + Direct labor + variable overhead

Cost of making = 13 + 12 + 11 = $36

Since the marginal cost of making is more than the marginal cost of buying, Ferro Inc should consider buying steel wheels from the outside supplier as it gives Ferro a saving of $1/ wheel

Hope that helps.