Beto Company pays $3.30 per unit to buy a part for one of the products it manufactures. With excess capacity, the company is considering making the part. Making the part would cost $2.40 per unit for direct materials and $1.00 per unit for direct labor. The company normally applies overhead at the predetermined rate of 200% of direct labor cost. Incremental overhead to make the part would be 80% of direct labor cost.
a) Prepare a make or buy analysis of costs for this part.
b) Should Beto make or buy this part.
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a) Make or Buy Analysis:
Cost to Buy:
$3.30 per unit
Cost to Make:
Direct Materials: $2.40 per unit
Direct Labor: $1.00 per unit
Overhead (200% of Direct Labor): $2.00 per unit
Incremental Overhead (80% of Direct Labor): $0.80 per unit
Total Cost to Make: $6.20 per unit
b) Beto should buy this part. The cost to make the part ($6.20 per unit) is higher than the cost to buy the part ($3.30 per unit). Therefore, it would be more cost-effective for Beto to buy the part rather than make it.
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