Question

Sheridan Company can produce 100 units of a component part with the following costs: Direct Materials $22000 Direct Labor 6500 Variable Overhead 20000 Fixed Overhead 11000 If Sheridan Company can purchase the component part externally for $55000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision

Answer 1

If the company makes the component, it will save $2,500.

Step-by-step explanation:

To determine which option is better, we need to calculate the total cost of each option and choose the cheapest one. We will take into account the avoidable fixed overhead cost, thus the rest is inconsequential to the decision-making process.

Make in-house:

Direct material= $22,000

Direct labor= $6,500

Variable overhead= $20,000

Avoidable fixed overhead= $4,000

Total cost= $52,500

Buy:

Total cost= $55,000

If the company makes the component, it will save $2,500.