Managerial Accounting

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Make vs. Buy Costs


Shenk Company needs 20,000 components for a product it manufactures. If Shenk buys the component from Vistavia Company instead of making it, Shenk could rent the released facilities as storage to another company for \$70,000. Sixty percent of the fixed overhead applied will continue to be incurred regardless of what decision is made.

The following information is available:

Cost to Shenk to make the part himself:
Direct materials -- \$5
Direct labor -- \$16
Variable overhead -- \$8
Fixed overhead -- \$10

Cost to buy the part from Vistavia Company: \$44

Which alternative is more desirable for Shenk and by what amount (in $)?