Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $54.00
Direct labor 35.00
Variable overhead 40.00
Fixed overhead 34.00
Total $163.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?

If the company buys the units, income will decrease by $1,000.-

Explanation:

Giving the following information:

Direct materials $54.00

Direct labor 35.00

Variable overhead 40.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal.

First, we need to determine the total cost of making the units:

Total cost= total variable costs + avoidable fixed costs

Total costs= (54 + 35 + 40)*6,000 + 89,000= $863,000

Now, the cost of buying:

Total cost= 6,000*144= $864,000

If the company buys the units, income will decrease by $1,000.-