Question

Hot Dog Express (HDE) is currently buying its buns from Buns-For-All for $0.50 per dozen. Each month, it purchases 14,000 dozen buns. HDE is considering making its own buns for cost-cutting and quality reasons. It has determined the following costs:

materials, $0.20;
direct labor, $0.10;
variable factory overhead cost, $0.04; and total (existing) fixed costs, $3,000 per month.
Required:
A) From an accounting point of view only, should HDE make or buy its buns?

Answer 1

Cost of Make = $2,240

Step-by-step explanation:

The computation of Saving in Cost by Make or buy is shown below:-

Make Buy

Material $2,800

($0.20 × 14,000 Buns)

Direct Labor $1,400

($0.10 × 14,000 Buns)

Variable Factory Overhead $560

($0.04 × 14,000 Buns)

Purchase Cost of Buns $7,000

(14,000 × $ 0.50)

Total Cost $4,760 $7,000

Therefore the Saving in Cost by Make = $7,000 - $4,760

= $2,240