Sutton Inc. can produce 100 units of a component part with the following costs: Ch01Q78 If Sutton Inc. can purchase the component part externally for $345,000 and only $28,000 of the fixed costs can be avoided, what is the correct make-or-buy decision

Question Completion:

Direct materials cost $150,000

Direct labor cost $100,000

Variable overhead $50,000

Fixed overhead $60,000

Sutton Inc.

The correct make-or-buy decision is:

Continue to produce the component.

Explanation:

a) Data and Calculations:

Production costs:

Direct materials cost $150,000

Direct labor cost       $100,000

Variable overhead     $50,000

Fixed overhead         $60,000

Production costs =  $360,000

Relevant costs to make:

Direct materials cost $150,000

Direct labor cost       $100,000

Variable overhead     $50,000

Fixed overhead          $28,000

Avoidable costs =    $328,000

Cost of purchasing the component = $345,000

Difference = $17,000

Sutton will pay $17,000 more if it buys the component than if it makes it.  Therefore, it is more cost-effective to make the component than buying from the outside supplier.