Credell Company uses 12,000 units of a part in its production process.The costs to make a part are: direct material,$15; direct labor,$27; variable overhead,$15; and applied fixed overhead,$32.Anderson has received a quote of $60 from a potential supplier for this part.If Credell buys the part,75 percent of the applied fixed overhead would continue.Credell Company would be better off by
A)$30,000 to manufacture the part.
B)$348,000 to buy the part.
C)$60,000 to buy the part.
D)$216,000 to manufacture the part.

Question

Quizplus · Accepted Answer

Total cost to manufacture the parts = Direct material + Direct labor + Variable overhead + Applied fixed overhead = $15 + $27 + $15 + $32 = $89 per unit

Total cost for 12,000 units = $89 x 12,000 = $1,068,000

If Credell buys the part at $60 per unit, the total cost for 12,000 units would be $60 x 12,000 = $720,000

75% of the applied fixed overhead will continue, which is $32 x 75% = $24

Total cost to manufacture after buying the part = Direct material + Direct labor + Variable overhead + 75% Applied fixed overhead + Cost to buy the part = $15 + $27 + $15 + $24 + $60 = $141 per unit

Total cost for 12,000 units after buying the part = $141 x 12,000 = $1,692,000

The cost to buy the part is less than the cost to manufacture the part after buying it. Therefore, Credell Company would be better off by buying the part at $60.

Credell Company Uses 12,000 Units of a Part in Its