Beto Company pays $6.70 per unit to buy a part for one of the products it manufactures. With excess capacity, the company is considering making the part. Making the part would cost $7.50 per unit for direct materials and $1.00 per unit for direct labor. The company normally applies overhead at the predetermined rate of 200% of direct labor cost. Incremental overhead to make the part would be 80% of direct labor cost.

 Exercise 10-1 (Algo) Make or buy LO P1
Beto Company pays $6.70 per unit to buy a part for one of the products it manufactures. With excess capacity, the company is considering making the part. Making the part would cost $7.50 per unit for direct materials and $1.00 per unit for direct labor. The company normally applies overhead at the predetermined rate of 200% of direct labor cost. Incremental overhead to make the part would be 80% of direct labor cost.

(a) Prepare a make or buy analysis of costs for this part. (Enter your answers rounded to 2 decimal places.)
(b) Should Beto make or buy the part?

 

Explanation
(a)
Overhead (incremental, 80% of direct labor) = $0.80
Decision: Cost savings to Buy: $2.60

(b)
Buy Part. The company should buy the part because its cost is less than the cost to make it.

Thanks