Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 11

The make or buy decision Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is considering making the part internally. After performing a capacity analysis, Sycamore determined that it has sufficient unused capacity to manufacture the 14,400 parts but would need to hire a manager atan annual salary of $43,200 to oversee this production activity. Estimated production costs are determined to be:

Direct material	$18
Direct labor	8
Variable overhead	4
Fixed overhead (includes manager at $3 per unit)	7
Total unit cost	$37

Required:

a. Identify the relevant costs to make this part internally.

---

b. Should Sycamore produce the part or continue to buy it from the outside supplier?

---

c. What other factors are important to this decision?

Step 1 of 3

a) Identify the relevant cost for accepting or rejecting the order

The relevant cost to produce the part internally is similar to the avoidable costs that could be eliminated if a company did continue to purchase the parts from the outside. These avoidable costs would consist of direct material cost, direct labor cost, variable overhead, and the salary of new manager.