Question

ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are: Direct materials $8 Direct labor 2 Variable overhead 1 Fixed overhead 4 ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12. Fixed overhead is unavoidable. Should ColorPro make or buy the part?

A. Buy the part because it will save $300,000 over making it.
B. Buy the part because it will save 1,100,000 over making it.
C. Make the part because it will save $100,000 over buying it.
D. Buy the part because it will save $100,000 over making it.
E. Make the part because it will save $1,100,000 over buying it.

Answer 1

If the company makes the units, it will save $100,000.

Step-by-step explanation:

Giving the following information:

Direct materials $8

Direct labor 2

Variable overhead 1

Number of units= 100,000

Buying= $12 per unit

As the fixed costs are unavoidable, should not be taken into account.

Total cost of production= (8 + 2 + 1)*100,000= $1,100,000

Total cost of buying= 12*100,000= $1,200,000

If the company makes the units, it will save $100,000.