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