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9 December, 11:01

Crane's Manufacturing Company can make 100 units of a necessary component part with the following costs:

Direct Materials $129000

Direct Labor 34000

Variable Overhead 48000

Fixed Overhead 30000

If Crane's Manufacturing Company can purchase the component externally for $215000 and only $8000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

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  1. 9 December, 13:20
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    The correct decision is to purchase the component as it can save $18,000 of the company by buying.

    Explanation:

    The cost of making 100 units:

    Cost of making = Direct materials + Direct labor + Variable overhead + Fixed overhead

    = $129,000 + $34,000 + $48,000 + $30,000

    = $241,000

    The cost of buying 100 units:

    Cost of buying = Purchase price + Unavoidable fixed cost

    = $215,000 + $8,000

    = $223,000

    The correct decision is to purchase the component as it can save $18,000 of the company by buying.
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