The Norran Company needs 15,000 units of a certain part to use in its production cycle. If Norran buys the part from Waterloo Company instead of making it, Norran could not use the released facilities in another activity; thus, all of the fixed overhead applied will continue regardless of what decision is made. Accounting records provide the following data: Cost to Norran to make the part:
Direct materials, $3
Direct labor, $12
Variable overhead, $13
Fixed overhead applied, $8
Cost to buy the part from the Waterloo Company, $27
What should Norran's decision be, and what is the total cost savings that would result?
A) Buy, $90,000
B) Buy, $15,000
C) Make, $90,000
D) Make, $15,000

Question

Quizplus · Accepted Answer

To determine the cost savings, we need to compare the cost to make the part with the cost to buy the part.

Cost to make the part = Direct materials + Direct labor + Variable overhead + Fixed overhead applied
= $3 + $12 + $13 + $8
= $36 per unit

Cost to buy the part = $27 per unit

Since buying the part from Waterloo Company is cheaper than making it, Norran should choose to buy the part. The savings would be:

$36 - $27 = $9 per unit

Total cost savings = $9 x 15,000 = $135,000

However, the question only asks for the total cost savings and not the total cost. Thus, the answer would be B) Buy, $15,000.

The Norran Company Needs 15,000 Units of a Certain Part