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Making a component costs $22.40 in materials, $14.00 in labour and $5.60 in fixed factory overhead that continues whichever option is chosen. What is the relevant cost of making one unit?
A$36.40 per case
B$42.00 per case
C$37.90 per case
D$22.40 per case
Answer & Solution
Correct answer: A. $36.40 per case
1. Only costs that change between making and buying belong in the comparison.
2. Direct materials of $22.40 and direct labour of $14.00 both disappear if the part is bought in.
3. Those two add to $36.40 per unit.
4. Fixed factory overhead of $5.60 is incurred under either alternative, so it is excluded.
5. $42.00 includes that fixed overhead and so overstates the true cost of making.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.2 Make or Buy a Component Part_
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