home work econ book

A company is analyzing a make-versus-purchase situation for a component used in several products,
and the engineering department has developed these data:
Option A: Purchase 10,000 items per year at a fixed price of $8.50 per item. The cost of placing
the order is negligible according to the present cost accounting procedure.
Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost
estimates are direct materials = $5.00 per item and direct labor = $1.50 per item.
Manufacturing overhead is allocated at 200% of direct labor (= $3.00 per item).
Based on these data, should the item be purchased or manufactured?
(2.4 )
Option a: 10,000* $8.50= $85.000
Option b : 10000*$5.00 +( $1.50 * 10000)+ ($3.00 * 10,000) = $95,000
Based on calculations option A should be used.

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