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8 June, 09:27

Waterway Industries can produce 100 units of a component part with the following costs: Direct Materials $15800 Direct Labor 6900 Variable Overhead 16800 Fixed Overhead 12000 If Waterway Industries can purchase the component part externally for $47100 and only $4100 of the fixed costs can be avoided, what is the correct make-or-buy decision?

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  1. 8 June, 13:05
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    If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.

    Explanation:

    current production costs:

    direct materials $15,800

    Direct labor $6,900

    Variable overhead $16,800

    Fixed overhead $12,000

    total costs = $51,500

    if the company can purchase the 100 units form an outside vendor for $47,100 and avoid $4,100, its total costs would be:

    purchase price $47,000

    fixed overhead = $12,000 - $4,100 = $7,900

    total costs = $54,900

    If the company decides to purchase the parts, its total costs will increase by $3,400, so it should continue to manufacture the part.
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