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8 October, 03:40

Bonita's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $119000 Direct Labor 24000 Variable Overhead 53000 Fixed Overhead 30000 If Bonita's Manufacturing Company can purchase the component externally for $195000 and only $6000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

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  1. 8 October, 03:54
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    The correct decision is to buy the component.

    Explanation:

    We need to calculate the manufacturing cost of the product and then compare it to the purchase price and the fixed cost after purchase.

    Manufacturing Cost:

    Direct Material $119,000

    Direct Labor $24,000

    Variable Overhead $53,000

    Fixed Overhead $30,000

    Total cost $226,000

    Purchasing cost:

    Purchase price $195,000

    Fixed cost $6,000

    Total cost $201,000

    As the cost to purchase price is lower than the component manufactured, so, Bonita's Manufacturing Company should buy this component to save cost.
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