Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available: Oriole Company has offered to sell this part to Cardinal company for $36 each.If Cardinal buys the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs will continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,the total relevant costs to make the part are:
A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

Question

Cardinal Company needs 20,000 units of a certain part to use in one of its products.The following information is available:  Oriole Company has offered to sell this part to Cardinal company for $36 each.If Cardinal buys the part from Oriole instead of making it,Cardinal would not have any use for the released capacity.In addition,60% of the fixed manufacturing overhead costs will continue regardless of what decision is made.Assume that direct labour is an avoidable cost in this decision.In deciding whether to make or buy the part,the total relevant costs to make the part are:
A) $560,000. 
B) $640,000. 
C) $720,000. 
D) $760,000.

Quizplus · Accepted Answer

The total relevant costs to make the part include:
- Direct materials: 20,000 units x $22 = $440,000
- Direct labor: 20,000 units x $8 = $160,000
- Variable overhead: 20,000 units x $6 = $120,000
- Fixed overhead (40% of total fixed overhead): 20,000 units x $20 x 40% = $160,000
Total relevant cost = $880,000

If Cardinal buys the part from Oriole, it will cost $36 x 20,000 = $720,000. Since 60% of fixed overhead costs will continue regardless of the decision, Cardinal will still incur $20 x 20,000 x 60% = $240,000 of fixed overhead costs. Therefore, the total cost of buying the part is $960,000.

Comparing the total relevant cost of making ($880,000) vs the total cost of buying ($960,000), it is better for Cardinal to make the part themselves. Therefore, the best choice is to MAKE.

Cardinal Company Needs 20,000 Units of a Certain Part to Use