A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering department has developed these data: Option A: Purchase 10,000 items per year at a fixed price of $8.88 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials = $4.96 per item and direct labor = $1.31 per item. Manufacturing overhead is allocated at 200% of direct labor ($2.62 per item). Based on these data, should the item be purchased or manufactured? The total cost of Option A is $ The total cost of Ontion B is $ (Round to the nearest dollar.) (Round to the nearest dollar)

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter8: Cost Analysis
Section: Chapter Questions
Problem 5E
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A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering
department has developed these data:
Option A:
Option B:
Purchase 10,000 items per year at a fixed price of $8.88 per item. The cost of placing the order is negligible
according to the present cost accounting procedure.
Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct
materials = $4.96 per item and direct labor = $1.31 per item. Manufacturing overhead is allocated at 200% of
direct labor (= $2.62 per item).
Based on these data, should the item be purchased or manufactured?
The total cost of Option A is $
(Round to the nearest dollar.)
The total cost of Option B is $
. (Round to the nearest dollar.)
Should the item be purchased or manufactured? Choose the correct answer below.
O The item should be manufactured.
O The item should be purchased.
Transcribed Image Text:A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering department has developed these data: Option A: Option B: Purchase 10,000 items per year at a fixed price of $8.88 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials = $4.96 per item and direct labor = $1.31 per item. Manufacturing overhead is allocated at 200% of direct labor (= $2.62 per item). Based on these data, should the item be purchased or manufactured? The total cost of Option A is $ (Round to the nearest dollar.) The total cost of Option B is $ . (Round to the nearest dollar.) Should the item be purchased or manufactured? Choose the correct answer below. O The item should be manufactured. O The item should be purchased.
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