Crane Company can produce 100 units of a component part with the following costs: Direct Materials $18000 Direct Labor 9500 Variable Overhead 16000 Fixed Overhead 11000 If Crane Company can purchase the component part externally for $50000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Question

Smarty

Business

14 May, 19:17

Crane Company can produce 100 units of a component part with the following costs: Direct Materials $18000 Direct Labor 9500 Variable Overhead 16000 Fixed Overhead 11000 If Crane Company can purchase the component part externally for $50000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

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Answers (1)

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Cornelius Daniels · Answer 1

Yes, it generates a 2,500 financial advantage

Explanation:

produce:

variable cost:

18,000 + 9,500 + 16,000 = 43,500

fixed cost

tracable 4,000

produce 47,500

Buy 50,000

unavoidable 7,000

The unavoidable fixed cost are incurred on any alternative so we must disregard them.

With that in mind, we determinate that produce the units generates a 2,500 financial advantage.