US CMA Part 2 · Chapter 6 · Question 5 of 22
Cromwell Engines makes 10,000 valves a year. Unit costs are: direct materials $8, direct labor $6, variable overhead $4 and fixed overhead $7. If the valves are bought outside, 40% of the fixed overhead would be avoided. An outside supplier offers the valves at $21 each. Which option is cheaper and by how much in total?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Make; saves $2,000
Explanation
Relevant cost to make = $8 + $6 + $4 + (40% x $7) = $18 + $2.80 = $20.80. Buying costs $21, so making is cheaper by $0.20 x 10,000 = $2,000. Using full cost of $25 wrongly includes unavoidable fixed overhead and suggests buying.
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