Answered Essay: The estimated cost of producing 200,000 units is Direct Material     82 Direct Labor       37

The estimated cost of producing 200,000 units is

Direct Material     82

Direct Labor       37

Variable Factory   22

Overhead

Fixed Factory      40

Overhead

The same unit can be purchased for $166 and 40% of

The fixed factory overhead can be saved (avoided) should

The Company make or buy?

Expert Answer

If company makes the product:

Total cost of production = total variable cost + fixed factory overhead cost

Total cost of production = No. of units*(Direct material cost + direct labor cost+ variable overhead) + fixed factory overhead cost

Total cost of production = 200000*(87+37+22) + 40 = $29200040

If company buys the product:

Total cost of production (after adjustment of the saving) = 200000*166 – 40*40% = $33199984

Since, it costs relatively less when the company makes the product, so the company should take the “make” the decision to product.

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