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F. Naz
F. Naz, Chartered Accountant
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Iwasaki Inc. is considering whether to continue to make a component

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Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:



Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minute on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?
Submitted: 5 years ago.
Category: Homework
Expert:  F. Naz replied 5 years ago.
The relevant costs In this scenario are direct maerial, direct labor, if any other variable manfuacturing cost, 30% of fixed manufacturing overhead and opportunity cost of loosing contribution margin for not making another part and which is $5.2 per unit, but for this decision the 5.2/2 = $2.6 per unit to be taken, as the another components require 2 minutes to produce the product

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Customer: replied 5 years ago.
so, what cost of making the component should be compared to the price of buying the component?
Expert:  F. Naz replied 5 years ago.
The cost of direct material, direct labor , variable manufacturing overheads, if any and 30% of avoidable manufacturing cost should be the part of cost of making the components. These costs are not given in the data you have provided. thanks.
Customer: replied 5 years ago.
Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials $8.80
Direct labor 5.80
variable manufacturing overhead 1.60
fixed manufacturing overhead 3.60

Unit product cost = $19.80


Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minute on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $5.20 per unit.
When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?
Expert:  F. Naz replied 5 years ago.
THIS ANSWER IS LOCKED!

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