Question

Beto company pays $3.50 per unit to buy a part for one of the products it manufactures. with excess capacity, the company is considering making the part. making the part would cost $2.70 per unit for direct materials and $1.00 per unit for direct labor. the company normally applies overhead at the predetermined rate of 200% of direct labor cost. incremental overhead to make the part would be 80% of direct labor cost.

(a) prepare a make or buy analysis of costs for this part.

Answer 1

The make or buy analysis shows that it costs Beto Company $4.50 per unit to make a part in-house, which is higher than the purchase cost of $3.50 per unit. Therefore, it is more cost-efficient to buy the part.

Step-by-step explanation:

The make or buy analysis of costs for Beto Company involves comparing the costs of buying a part at $3.50 per unit against the costs of making it in-house. The expenses associated with manufacturing include $2.70 per unit for direct materials and $1.00 per unit for direct labor. The company also applies overhead at a predetermined rate of 200% of direct labor cost, but incremental overhead if the part is made in-house would be 80% of direct labor cost.

To calculate the costs, we use the following information:

• 
  
• Direct Materials Cost: $2.70/unit
• 
  
• Direct Labor Cost: $1.00/unit
• 
  
• Normal Predetermined Overhead Rate: 200% of direct labor
• 
  
• Incremental Overhead Rate: 80% of direct labor

Calculation for making the part in-house:

• 
  
• Direct Materials: $2.70
• 
  
• Direct Labor: $1.00
• 
  
• Incremental Overhead: 80% of $1.00 = $0.80
• 
  
• Total Cost per Unit: $2.70 + $1.00 + $0.80 = $4.50

Since the cost to make the part in-house ($4.50) is higher than the cost to buy ($3.50), it is more cost-effective for Beto Company to buy the part rather than manufacture it.