Cierra, Inc. manufactures computer chips. Currently, the costs per unit are as follows: Direct materials $ 1.00 Direct labor 10.00 Variable manufacturing overhead 5.00 Fixed manufacturing overhead 8.00 Total $ 24.00 Chips Corp., has contacted Cierra with an offer to sell to Cierra 10,000 of the chips for $22.00 per chip. If Cierra accepts the proposal, $50,000 of the fixed overhead will be eliminated. Should Cierra make or buy the chips

It is more convenient to make the component.

Explanation:

Giving the following information:

Direct materials $1.00

Direct labor 10.00

Variable manufacturing overhead 5.00

Total unitary variable cost = $16

Total fixed overhead = 8*10,000 = $80,000

Proposal = 10,000 units for $22

If Cierra accepts the proposal, $50,000 of the fixed overhead will be eliminated.

We need to calculate the total cost of both options and determine which one is better.

Make in-house:

Total cost = 10,000*16 + 50,000 = $210,000

Buy:

Total cost = 10,000*22 = $220,000

It is more convenient to make the component.