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Make or Buy Analysis
Foster Company makes 20,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows;
Direct Materials
Direct Labour $24.70
Variable Manufacturing Overhead $16.30
Fixed Manufacturing Overhead $2.30
Unit Product Cost $13.40
$56.70
Required:
Question 1: How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
Question 2: What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
Question 3: What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?
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