Please use the following information for problems 4 and 5: Cost of making the co
ID: 2520522 • Letter: P
Question
Please use the following information for problems 4 and 5:
Cost of making the component for ABC Company (per unit):
Direct materials $15
Direct labor (all variable) 20
Variable manufacturing overhead 10
Fixed manufacturing overhead 25
The ABC Company uses this component to make its products, and it makes 10,000 units of this component per year. The XYZ Company has offered to sell to ABC the exact same component for $60 per unit. If ABC stops making the component, there is no alternative use for the area of the factory where the component is made. How much would ABC’s operating income increase or decrease if it buys the component from XYZ, assuming that $13 of the fixed manufacturing overhead cost will not be avoided if ABC buys the component? Should ABC make the component or buy it from XYZ?
The ABC Company uses this component to make its products, and it makes 10,000 units of this component per year. The XYZ Company has offered to sell to ABC the exact same component for $60 per unit. If ABC stops making the component, it can lease the area of the factory where the component is made and receive $40,000 per year. How much would ABC’s operating income increase or decrease if it buys the component from XYZ, assuming that $13 of the fixed manufacturing overhead cost will not be avoided if ABC buys the component? Should ABC make the component or buy it from XYZ?
Explanation / Answer
Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Make Buy Differential Direct Materials = 10000*15 150,000.00 150,000.00 Direct Labour = 10000*20 200,000.00 200,000.00 Variable manufacturing overhead = 10000*10 100,000.00 100,000.00 Relevant Fixed manufacturing cost = (25-13)10000 120,000.00 120,000.00 Purchase cost = 10,000*60 600,000.00 (600,000.00) Total Relevant Cost 570,000.00 600,000.00 (30,000.00) ABC should make the component Paticulars Make Buy Differential Direct Materials = 10000*15 150,000.00 150,000.00 Direct Labour = 10000*20 200,000.00 200,000.00 Variable manufacturing overhead = 10000*10 100,000.00 100,000.00 Relevant Fixed manufacturing cost = (25-13)10000 120,000.00 120,000.00 Lease Income (40,000.00) 40,000.00 Purchase cost = 10,000*60 600,000.00 (600,000.00) Total Relevant Cost 570,000.00 560,000.00 10,000.00 ABC should buy the component