Vaughn's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $127000 Direct Labor 32000 Variable Overhead 44000 Fixed Overhead 30000 If Vaughn's Manufacturing Company can purchase the component externally for $205000 and only $4000 of the fixed costs can be avoided, what is the correct make-or-buy decision? Buy and save $2000 Make and save $16000 Buy and save $16000 Make and save $2000

Buy and save $2000

Explanation:

Vaughn's Manufacturing Company

Differential Analysis

Make Buy

Direct Materials $127000

Direct Labor 32000

Variable Overhead 44000

Fixed Overhead 30000 26000

Purchasing Cost $205000

Total 233,000 231,000

From the above we see that the total costs to make are $ 233,000 and purchasing costs are $ 231,000. There's a difference of $ 2,000 so buying and saving $ 2000 is the correct option.

$ 26,000 (30000 - 4000) are irrelevant costs that will continue whether the product is purchased or made.