Final answer:
The cost-per-unit to manufacture the part in-house for Beto Company is $10.20, which is higher than the purchase price of $7.30, thus it is more economical for the company to continue purchasing the part rather than producing it themselves.
Step-by-step explanation:
The student's question pertains to a cost analysis for a decision on whether Beto Company should continue to buy a part or begin manufacturing it themselves. The company currently purchases the part for $7.30 each, but if they were to produce it in-house, the direct materials cost would be $8.40 per unit, and the direct labor cost would be $1.00 per unit. Additionally, Beto Company applies overhead at a rate of 200% of direct labor cost. However, the incremental overhead for making the part would amount to 80% of direct labor cost. Therefore, when calculating the total production cost for the part, the company needs to account for both the direct and indirect costs associated with in-house manufacturing.
To calculate the total cost of making the part, we add direct materials, direct labor, and incremental overhead costs:
- Direct Materials: $8.40
- Direct Labor: $1.00
- Incremental Overhead (80% of direct labor): 0.80 x $1.00 = $0.80
The total cost to make the part in-house would be $8.40 (direct materials) + $1.00 (direct labor) + $0.80 (incremental overhead) = $$10.20 per unit. Considering that the purchase price per unit is $7.30, and the total production cost is $10.20, it is more cost-effective for the company to continue purchasing the part rather than producing it in-house, based on these calculations alone.