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10 July, 05:38

Vaughn's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $127000 Direct Labor 32000 Variable Overhead 44000 Fixed Overhead 30000 If Vaughn's Manufacturing Company can purchase the component externally for $205000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision? Buy and save $2000 Make and save $16000 Buy and save $16000 Make and save $2000

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  1. 10 July, 08:52
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    Buy and save $2000

    Explanation:

    Vaughn's Manufacturing Company

    Differential Analysis

    Make Buy

    Direct Materials $127000

    Direct Labor 32000

    Variable Overhead 44000

    Fixed Overhead 30000 26000

    Purchasing Cost $205000

    Total 233,000 231,000

    From the above we see that the total costs to make are $ 233,000 and purchasing costs are $ 231,000. There's a difference of $ 2,000 so buying and saving $ 2000 is the correct option.

    $ 26,000 (30000 - 4000) are irrelevant costs that will continue whether the product is purchased or made.
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