Question

Wehner Company is currently manufacturing Part ABS-43, producing 55,000 units annually. The part is used in the production of several products made by Wehner. The cost per unit for ABS-43 is as follows:

Direct materials $45.60

Direct labor 9.80

variable overhead 2.75

Fixed overhead 3.90

Total : $62.05

Of the total fixed overhead assigned to ABS-43, $15,400 is direct fixed overhead (the annual lease cost of machinery used to manufacture Part ABS-43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Wehner for $58. There is no alternative use for the facilities currently used to produce the part. No significant non-unit-based overhead costs are incurred.

1. Should Wehner Company make or buy Part ABS-43?

Answer 1

Wehner Company should continue to make Part ABS-43, as the cost per unit of making the part is approximately $61.10, which is lower than the $58.00 offer from the supplier when considering the relevant costs.

Step-by-step explanation:

The Wehner Company should consider making Part ABS-43 if the total relevant cost of making the part is less than the cost to buy it from the outside supplier. The relevant costs are the direct materials, direct labor, variable overhead, and any direct fixed overhead that cannot be avoided if production is halted. The common fixed overhead should not be considered, as it will be incurred regardless of the make-or-buy decision.

Direct materials per unit cost $45.60, direct labor costs $9.80 per unit, variable overhead is $2.75 per unit, and direct fixed overhead allocated to ABS-43 is $15,400 annually. Multiplying the variable costs by the annual quantity, we get the total variable costs: ($45.60 + $9.80 + $2.75) * 55,000 units = $3,344,750. The direct fixed overhead remains constant at $15,400 per year. Thus, the total annual cost to make Part ABS-43 is $3,360,150 ($3,344,750 + $15,400). Dividing this by the annual quantity gives a cost per unit of approximately $61.10. This is less than the $58.00 buy price, so it would save costs to continue making the part.