Master Machine Corporation incurs the following estimated annual costs in making

ID: 2377322 • Letter: M

Question

Master Machine Corporation incurs the following estimated annual costs in making a

subassembly for one of its products:

Total Cost for

20,000 units Unit Cost

Factory Overhead:

Variable $ 300,000 $15

Fixed $ 960,000 $48

Direct Labor $ 900,000 $45

Direct Materials $ 600,000 $30

Another manufacturer offers to sell Master Machine the same subassembly for $96 per

unit for 20,000 units per year. Determine whether Master Machine should make or buy the

subassembly, assuming that the plant capacity now used to make the subassembly would

become idle if they were purchased and that $200,000 of the fixed factory overhead could be avoided by not making the subassembly.

cost for making sub assembly =300,000+960,000+900,000+600,000

=2,760,000

cost for purchasing assembly= 96*20,000-200,000 (it was told.. can avoid 200,000)

=1,720000

there fore it is better to purchase than to make