Question

Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as​ follows:Direct materials$ 53Direct labor40Variable overhead36Fixed overhead31Total costs$ 160Crayola Technologies Inc. has contacted Rubium with an offer to sell 7 comma 000 of the subassemblies for $ 145 each. Rubium will eliminate $ 85 comma 000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the​ subassemblies? What is the difference between the two​ alternatives?

Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Total Unit Cost of Making Product = Direct Material + Direct Labor + Variable Overhead + Fixed Overhead

= $53 + $40 + $36 + $31

= $160

Total Unit Cost of Buying Product = Fixed Cost + Purchase Cost

= $31 + $145

= $176

Particular Make product($) Buy product($)

Direct material(7,000 × $53) 371,000 -

Direct labor(7,000 × $40) 280,000 -

Variable overhead(7,000 ×$36) 252,000 -

Fixed overhead(7,000 × $31) 217,000 132,000

(217,000 - 85,000)

Purchase cost 7,000 × $145 = 1,015,000

Total cost 1,120,000 1,147,000

Difference between two alternatives

= $1,147,000 - $1,120,000

= $27,000

According to the analysis, rubium make the product because buying product cost is more than making the product.