Anderson Company uses 10,000 units of a part in its production process.The costs to make a part are: direct material,$12; direct labor,$25; variable overhead,$13; and applied fixed overhead,$30.Anderson has received a quote of $55 from a potential supplier for this part.If Anderson buys the part,70 percent of the applied fixed overhead would continue.Anderson Company would be better off by
A)$50,000 to manufacture the part.
B)$150,000 to buy the part.
C)$40,000 to buy the part.
D)$160,000 to manufacture the part.

Question

Quizplus · Accepted Answer

To determine if Anderson Company would be better off buying or making the part, we need to compare the total cost to make the part to the cost to buy the part.

Total cost to make the part:
Direct material + Direct labor + Variable overhead + Applied fixed overhead
= $12 + $25 + $13 + $30
= $80 per unit

Total cost to buy the part = $55 per unit

If Anderson buys the part, 70% of the applied fixed overhead would continue. This means that Anderson would save 30% of the applied fixed overhead, which is $9 per unit ($30 x 0.3).

Therefore, the total cost to buy the part would be $55 + $9 = $64 per unit.

Since $64 is less than $80, it would be better for Anderson to buy the part from the potential supplier.

To find out how much Anderson would save by buying the part, we can calculate the total cost of making the part and subtract the total cost of buying the part:
Total cost to make the part = $80 x 10,000 = $800,000
Total cost to buy the part = $64 x 10,000 = $640,000
Savings from buying the part = $800,000 - $640,000 = $160,000.

Therefore, Anderson would be better off by $160,000 if they buy the part instead of making it.

Anderson Company Uses 10,000 Units of a Part in Its