Question

Agler Corporation currently manufactures a sub assembly for its main product. The costs per unit are as follows:

Direct materials 1
Direct labor 10
Variable overhead 5
Fixed overhead 8
Total $ 24
Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the sub assemblies for $17 each. If Agler buys the sub assemblies, $2 of the fixed overhead per unit will be allocated to other products.
Should Agler make or buy the sub assemblies?

Answer 1

they should buy the sub assemblies

Step-by-step explanation:

The costs per unit are as follows:

• Direct materials $1
• Direct labor $10
• Variable overhead $5
• Fixed overhead $8
• Total $24

offer from an outside vendor = $17 per unit

non-avoidable fixed costs = $8 - $2 = $6

alternative 1 alternative 2 differential

keep producing purchase amount

purchase cost $0 $17 $17

avoidable costs $18 $0 ($18)

total $18 $17 ($1)

if the company decides to purchase the parts from an outside vendor it will save $1 per unit.