Question

Kando Company currently pays $19 per unit to buy a part for a product it manufactures. Instead, Kando could make the part for per unit costs of $8 for direct materials, $6 for direct labor, and $2 for incremental overhead. Kando normally applies overhead costs using a predetermined rate of 200% of direct labor cost.

(a) Prepare a make or buy analysis of costs for this part.
(b) Should Kando make or buy the part?

Answer 1

Kando Company's make or buy analysis reveals that making the part in-house would cost $26 per unit, higher than the purchase price of $19 per unit. Thus, Kando should continue to buy the part.

Step-by-step explanation:

The make or buy analysis for Kando Company should compare the cost of making the part in-house versus purchasing it from an external supplier. Currently, Kando pays $19 per unit to buy the part. If Kando decides to make the part, the costs would include $8 for direct materials, $6 for direct labor, and $2 for incremental overhead. However, Kando typically applies overhead using a rate of 200% of direct labor cost, which would amount to $12 ($6 direct labor * 200%).

Total cost to make the part:
Direct Materials: $8
Direct Labor: $6
Applied Overhead (200% of Direct Labor): $12
Total: $8 + $6 + $12 = $26

In this scenario, making the part in-house would cost Kando $26 per unit, which is more than the $19 per unit it currently pays to buy the part. Therefore, Kando should buy the part instead of making it, as it is cost-effective to do so.