Alibangbang Company produces 100,000 units of Part 34B, used in one of its snowblower engines, each year. An outside supplier has offered to supply the part for $4.75. The unit cost is: Direct material - $0.5; Direct labor - 2.4; Variable overhead (power) - 0.9; Fixed overhead - 1.05; Total unit cost - $4.85. Overhead is applied on the basis of machine hours. Part 34B requires 30,000 machine hours per year.  What if $60,000 of fixed overhead is supervision for Part 34B that is avoided if the part is purchased? Which alternative is more cost effective and by how much?  a.Buy, because of the company would be able to avoid $60,000 fixed overhead from supervision. b.Make, since the company would be able to save by fixed overhead by over $50,000. c.Buy, the company would be able to save $70,000 of variable costs. d.Make, since the company would still be able to save by as much as $35,000 despite the additional fixed overhead.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Alibangbang Company produces 100,000 units of Part 34B, used in one of its snowblower engines, each year. An outside supplier has offered to supply the part for $4.75. The unit cost is: Direct material - $0.5; Direct labor - 2.4; Variable overhead (power) - 0.9; Fixed overhead - 1.05; Total unit cost - $4.85. Overhead is applied on the basis of machine hours. Part 34B requires 30,000 machine hours per year. 

What if $60,000 of fixed overhead is supervision for Part 34B that is avoided if the part is purchased? Which alternative is more cost effective and by how much? 

a.Buy, because of the company would be able to avoid $60,000 fixed overhead from supervision.
b.Make, since the company would be able to save by fixed overhead by over $50,000.
c.Buy, the company would be able to save $70,000 of variable costs.
d.Make, since the company would still be able to save by as much as $35,000 despite the additional fixed overhead.

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