Practice Problem 1

The NCS Company currently makes Part 5A itself. The company is considering an offer from a supplier who is interested in manufacturing the part for NCS. The company has calculated the following costs related to purchasing the part from the vendor and to making the part itself:

Costs
Cost to purchase part	$20

Cost to make the part:	-
Variable expenses per unit:
Direct materials	$8
Direct labor	$6
Variable factory overhead	$4
Variable selling expense	$3
Total variable expenses	$21
Fixed expenses:	-
Fixed factory overhead	$4
Fixed selling and administrative expenses	$2
Total fixed expenses	$6

Fixed costs are unavoidable. Should NCS make or buy the part? Show calculations.

Solution

NCS should make the part; it can make the part for $18, and the part would cost $20 to purchase from a supplier. The calculations to support this decision are shown below:

-	Make	Buy	Difference
Variable costs:	-	-	-
Direct materials	$8	-	$8
Direct labor	$6	-	$6
Variable manufacturing overhead	$4	-	$4
Purchase cost	-	$20	($20)
Total cost per part	$18	$20	($2)

The fixed costs are unavoidable; therefore, the company must pay them regardless of whether it makes or purchases the part. Fixed costs are not relevant to this decision. The variable selling expenses will be incurred regardless of whether the company makes or buys the part.

Loading acctg211..

Practice Problem 1

Solution