28.3k views
3 votes
Waterway Industries can produce 100 units of a component part with the following costs: Direct Materials $15800 Direct Labor 6900 Variable Overhead 16800 Fixed Overhead 12000 If Waterway Industries can purchase the component part externally for $47100 and only $4100 of the fixed costs can be avoided, what is the correct make-or-buy decision?

1 Answer

6 votes

Answer:

If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.

Step-by-step explanation:

current production costs:

direct materials $15,800

Direct labor $6,900

Variable overhead $16,800

Fixed overhead $12,000

total costs = $51,500

if the company can purchase the 100 units form an outside vendor for $47,100 and avoid $4,100, its total costs would be:

purchase price $47,000

fixed overhead = $12,000 - $4,100 = $7,900

total costs = $54,900

If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.

User Mixologic
by
8.6k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories