Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 30,000 If Tex's Manufacturing Company can purchase the component externally for $190,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Is better to continue the production of the component as currently is taking allocated overhead from other department. Buying will inccur in a financial disadvangate of 25,000

Explanation:

Make

Direct cost:

DM 120,000

DL 25,000

VMO 45,000

Total Variable: 185,000

Tracable fixed cost: 5,000

Total cost: 190,000

Buy option:

purchase 190,000

unavoidable cost: (30,000 - 5,000) = 25,000

Total cost: 215,000