Question

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $15,000
Direct Labor
6,500
Variable Overhead
16,000
Fixed Overhead
11,000
f Fornelli, Inc. can purchase the component part externally for $44,000 and only $6,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?
Select one:
a. Buy and save $6,500
b. Make and save $500
c. Make and save $2,500
d. buy and save $2,500
e. Buy and save $500

Answer 1

c. Make and save $2,500
Explanation: The total cost of making the component part internally is $48,500 (Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead) while the cost of purchasing it externally is $44,000. By making the component part internally, Fornelli, Inc. saves $4,500 ($48,500 - $44,000), but $2,500 of this savings comes from avoiding fixed overhead costs. Therefore, the correct make-or-buy decision is to make and save $2,500.