Sheffield's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $122000 Direct Labor 34000 Variable Overhead 55000 Fixed Overhead 30000 If Sheffield's Manufacturing Company can purchase the component externally for $200000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Company Save $37000 by Buying

Explanation:

given data

make component part = 100 units

Direct Materials = $122000

Direct Labor = 34000

Variable Overhead = 55000

Fixed Overhead = 30000

purchase the component = $200000

fixed costs = $4000

to find out

make or buy decision

solution

first we find here Total Cost for Making component part

total cost = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead ... 1

put here value

total cost for make = $122000 + 34000 + 55000 + 30000

total cost for make = $241000

and

now we find here Total Cost for buying component part

total cost = Purchase Price + fixed costs ... 2

put here value we get

total cost for buying = $200000 + $4000

total cost for buying = $204000

so

we can say Company Save = $241000 - $204000 = $37000 by Buying