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Making a component costs $36.40 and buying it in costs $37.90, with quality and availability equal either way. What should the company do?
ABuy, since buying saves $1.50 on each case
BBuy, since buying saves $5.60 on each case
CMake, since making saves $1.50 on each case
DMake, since making saves $5.60 on each case
Answer & Solution
Correct answer: C. Make, since making saves $1.50 on each case
1. Where only costs differ, the cheaper alternative is the better one.
2. $37.90 minus $36.40 gives a difference of $1.50 per unit.
3. The lower figure belongs to making, so making saves $1.50 on each unit.
4. The company should manufacture the component rather than buy it in.
5. $5.60 is the excluded fixed overhead per unit, which is not a saving at all.
_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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