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:

Calculate relevant costs for making the part

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Calculate relevant costs for buying the part

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Compare costs and determine decision

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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