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Managerial Accounting

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Fritz Inc. Make or Buy: How Avoidable Fixed Costs Impact Decision

MGRACT-$91G3R

Fritz Inc. (FI) needs 50,000 sub-assemblies in their production of camera equipment. FI can buy the sub-assemblies from a vendor with a strong reputation for quality and reliability or they can make it for the following costs per unit:

Unit cost:
Direct Materials \$50
Direct Labor \$10
Variable Manufacturing Overhead \$15
Fixed Manufacturing Overhead \$20
Total cost per unit \$95

Which of these situations would result in a decision to recommend buying the sub-assemblies rather than making them?

A

10% of the fixed manufacturing overhead is avoidable if the sub-assemblies are purchased and the vendor price is \$80 each.

B

None of the fixed manufacturing overhead is avoidable if the sub-assemblies are purchased and the vendor price is \$90 each.

C

10% of the fixed manufacturing overhead is avoidable if the sub-assemblies are purchased, the vendor price is \$80 each, FI would incur an extra inspection cost for the sub-assemblies of \$2 each.

D

90% of the fixed manufacturing overhead is avoidable if the sub-assemblies are purchased and the vendor price is \$90 each.