Beta Inc. is considering whether to continue making a component or to buy it from an outside supplier. The company uses 18,000 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Direct materials Direct labor $8.20 2.50 Variable manufacturing overhead 1.30 Fixed manufacturing overhead Unit product cost 5.00 $17.00 Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from an outside supplier; the remainder is not avoidable. Additionally, making the component uses 5 minutes on the company's machine, which is its current constraint. If the component were outsourced, this machine time would be available for use on another product that requires 10 minutes per unit on the same machine and has a contribution margin of $9.00 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

Beta Inc. is considering whether to continue making a component or to buy it from an outside supplier. The company uses 18,000 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows: Direct materials Direct labor $8.20 2.50 Variable manufacturing overhead 1.30 Fixed manufacturing overhead Unit product cost 5.00 $17.00 Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from an outside supplier; the remainder is not avoidable. Additionally, making the component uses 5 minutes on the company's machine, which is its current constraint. If the component were outsourced, this machine time would be available for use on another product that requires 10 minutes per unit on the same machine and has a contribution margin of $9.00 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter5: Process Costing

Section: Chapter Questions

Problem 1PB: The following product costs are available for Stellis Company on the production of erasers: direct...

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