Question

kando company currently pays $18 per unit to buy a part for a product it manufactures. instead, kando could make the part for per unit costs of $8 for direct materials, $5 for direct labor, and $2 for incremental overhead. kando normally applies overhead costs using a predetermined rate of 200% of direct labor cost.

(a) prepare a make or buy analysis of costs for this part.
(b) should kando make or buy the part?

Explanation:

<pre_analysis>
{
"quality": "clear",
"question_count": 2,
"skills_matched": [
"step_cot",
"explain_then_answer",
"quick"
],
"needs_drawing": false,
"concepts_used": [],
"new_concepts": [
"Make or Buy Analysis",
"Relevant Costing",
"Incremental Overhead"
],
"current_concepts": [
"Make or Buy Analysis",
"Relevant Costing",
"Incremental Overhead"
]
}
</pre_analysis>

<reasoning>

Calculate relevant costs for making the part

\[

$$\begin{aligned} &\text{Direct materials} = \$8\\ &\text{Direct labor} = \$5\\ &\text{Incremental overhead} = \$2\\ &\text{Total cost to make per unit} = \$8 + \$5 + \$2 = \$15 \end{aligned}$$

\]

Calculate relevant costs for buying the part

\[

$$\begin{aligned} &\text{Cost to buy per unit} = \$18\\ &\text{Direct materials, direct labor, and overhead for buying} = \$0 \end{aligned}$$

\]

Compare costs and determine decision

\[

$$\begin{aligned} &\text{Cost to Make} = \$15 < \text{Cost to Buy} = \$18\\ &\text{Savings per unit by making} = \$18 - \$15 = \$3\\ &\text{Decision} = \text{Make} \end{aligned}$$

\]
</reasoning>

<answer>

Question (a)

(a) Item	Make	Buy
Direct labor	\$5	\$0
Overhead	\$2	\$0
Cost to buy	\$0	\$18
Cost per unit	\$15	\$18

Question (b)

(b) Company should:	Make

</answer>

<post_analysis>
{
"subject": "Business",
"question_type": "Multi-part",
"knowledge_point": [
"Business",
"Managerial Accounting",
"Make or Buy Decision"
]
}
</post_analysis>

Answer:

<pre_analysis>
{
"quality": "clear",
"question_count": 2,
"skills_matched": [
"step_cot",
"explain_then_answer",
"quick"
],
"needs_drawing": false,
"concepts_used": [],
"new_concepts": [
"Make or Buy Analysis",
"Relevant Costing",
"Incremental Overhead"
],
"current_concepts": [
"Make or Buy Analysis",
"Relevant Costing",
"Incremental Overhead"
]
}
</pre_analysis>

<reasoning>

Calculate relevant costs for making the part

\[

$$\begin{aligned} &\text{Direct materials} = \$8\\ &\text{Direct labor} = \$5\\ &\text{Incremental overhead} = \$2\\ &\text{Total cost to make per unit} = \$8 + \$5 + \$2 = \$15 \end{aligned}$$

\]

Calculate relevant costs for buying the part

\[

$$\begin{aligned} &\text{Cost to buy per unit} = \$18\\ &\text{Direct materials, direct labor, and overhead for buying} = \$0 \end{aligned}$$

\]

Compare costs and determine decision

\[

$$\begin{aligned} &\text{Cost to Make} = \$15 < \text{Cost to Buy} = \$18\\ &\text{Savings per unit by making} = \$18 - \$15 = \$3\\ &\text{Decision} = \text{Make} \end{aligned}$$

\]
</reasoning>

<answer>

Question (a)

(a) Item	Make	Buy
Direct labor	\$5	\$0
Overhead	\$2	\$0
Cost to buy	\$0	\$18
Cost per unit	\$15	\$18

Question (b)

(b) Company should:	Make

</answer>

<post_analysis>
{
"subject": "Business",
"question_type": "Multi-part",
"knowledge_point": [
"Business",
"Managerial Accounting",
"Make or Buy Decision"
]
}
</post_analysis>