Stephans corporation currently manufactures a subassembly for its main product. the costs per unit are as follows: direct materials $ 1.00 direct labor 10.00 variable overhead 5.00 fixed overhead 8.00 total $24.00 bill company has contacted stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. stephans will eliminate $25,000 of fixed overhead if it accepts the proposal. should stephans make or buy the subassemblies? what is the difference between the two alternatives?

Stephans shall make the product.

The difference is of $5,000 to be saved in case of making the product.

Explanation:

Provided details,

Cost per unit

Variable = Direct material $1 + Direct Labor $10 + Variable Overhead $5.00

= $16

Fixed overhead = $8

Including fixed cost the cost per unit of manufacturing = $16 + $8 = $24

In case of buying cost = $22 per unit.

Cost for 5,000 units in case of buying = $22 5,000 = $110,000

Cost of making 5,000 units = $24 5,000 = $120,000

Fixed cost for 5,000 units = $8 5,000 = $40,000

$25,000 cost is avoidable.

Therefore non avoidable cost = $40,000 - $25,000 = $15,000

Therefore total cost of purchasing = $110,000 + $15,000 = $125,000

Since total cost of purchasing is more than cost of making, goods shall be manufactured and not produced.

Difference = $125,000 - $120,000 = $5,000 additional in case of purchasing.

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