BUY vs MAKE

The estimated costs of producing 6,000 units of a component are:

  Per Unit Total

Direct Material Rs.10 Rs.60,000
Direct Labor 8 48,000
Applied Variable Factory
9 54,000
Overhead
Applied Fixed Factory Overhead 12 72,000
 
  Rs.39 Rs.234,000
The same component can be purchased from market at a price of Rs.29 per unit. If the
component is purchased from market, 25% of the fixed factory overhead will be saved.

Should the component be purchased from the market?

Solution  Per Unit Total

  Make Buy Make Buy
Purchase Price   Rs.29   Rs.174,000
Direct Material Rs.10   Rs.60,000  
Direct Labor 8   48,000  
Variable Overhead 9   54,000  
Relevant Fixed Overhead 3   18,000  
Total Relevant Costs Rs.30 Rs.29 Rs.180,000 Rs.174,000
Difference in Favor of
  Rs.1   Rs.6,000
Buying

For 10,000 Units

  Per Unit Total

Mak
  Buy Make Buy
e
Purchase Price   Rs.29   Rs……………..
Direct Material Rs.10   Rs…………….  
Direct Labor 8   ……………..  
Variable Overhead 9   ……………..  
Relevant Fixed Overhead 3   ………………  
Total Relevant Costs Rs.30 Rs.29 Rs……………. Rs……………
Difference in Favor of Buying   Rs.1   Rs……………