Question

beto company pays \\$4.70 per unit to buy a part for one of the products it manufactures. with excess capacity, the company is considering making the part. making the part would cost \\$4.50 per unit for direct materials and \\$1.00 per unit for direct labor. the company normally applies overhead at the predetermined rate of 200\\% of direct labor cost. incremental overhead to make the part would be 80\\% of direct labor cost.

(a) prepare a make or buy analysis of costs for this part.
note: enter your answers rounded to 2 decimal places.
(b) should beto make or buy the part?

Explanation:

Calculate relevant costs for making the part

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Calculate relevant costs for buying the part

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Determine cost difference and decision

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Answer:

Question 1

(a) Make or Buy Analysis	Make	Buy
Direct labor	\$1.00
Overhead	\$0.80
Cost to buy		\$4.70
Cost per unit	\$6.30	\$4.70
Cost difference	\$1.60

Question 2

(b) Company should:	Buy