Final answer:
The Sleepy Bandit Company would save $60,000 by buying the part from an external supplier compared to manufacturing it internally, considering the relevant portion of fixed overhead that would continue even if they purchase the part.
Step-by-step explanation:
The student is asking whether The Sleepy Bandit Company would save money by manufacturing a part internally or buying it from an external supplier for its 9000RTS machine production. The internal costs of manufacturing the part amount to a total of $12 in direct material, $25 in direct labor, $13 in variable overhead, and $30 in fixed overhead, while the quote from the external supplier for the same part is $56.
When analyzing make-or-buy decisions, we have to consider both the variable and fixed costs that vary with the decision to make or buy the part. Since 60 percent of the fixed overhead would continue even if the part is bought externally, the relevant cost of fixed overhead to consider is 40 percent of $30, which equates to $12.
Let's calculate the internal cost per part by adding the direct material, direct labor, variable overhead, and the relevant 40 percent of fixed overhead:
- Direct Material: $12
- Direct Labor: $25
- Variable Overhead: $13
- Relevant Fixed Overhead (40%): $12
Total internal cost per part = $12 + $25 + $13 + $12 = $62
Comparing the internal cost per part ($62) to the supplier's quote ($56), Sleepy Bandit Company saves $6 per unit by buying the part. Thus, for 10,000 units:
Total Savings = 10,000 units x $6/unit = $60,000
Therefore, The Sleepy Bandit Company would be better off by $60,000 to buy the part from the external supplier.