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beto company pays $2.50 per unit to buy a part for one of the products it manufactures. with excess capacity, the company is considering making the part. making the part would cost $1.20 per unit for direct materials and $1.00 per unit for direct labor. the company normally applies overhead at the predetermined rate of 200% of direct labor cost. incremental overhead to make the part would be 80% of direct labor cost. (a) prepare a make or buy analysis of costs for this part. (enter your answers rounded to 2 decimal places.) (b) should beto make or buy the part?



Answer :

rafikiedu08

The cost to make the part internally is $3.00 and the cost to buy is $2.50. So the company should buy the part as the cost to buy is less than cost to make.

a) It is given in the question that the beto company pays $2.50 per unit to buy a part for one of the products it manufactures.

Cost of direct materials in term of per unit = $1.20

Cost of direct labor term of per unit = $1

Further, Over Head cost to make the part is 80% of direct labor cost.

So, Overhead cost = 80% x $1.00 = $0.80

Therefore, total cost to make = Direct materials cost + direct labor cost + overhead cost

Total cost to make = 1.20 + 1 + 0.80 = $3.00

Difference in cost = total cost to make - cost to buy

Difference in cost = 3.00 - 2.50 = $0.50

b) The cost to make the part internally is $3.00 and the cost to buy is $2.50. So the company should buy the part as the cost to buy is less than cost to make.

To know more about Overhead cost

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