Liu Incis Considering Whether to Continue to Make a Component or or to Buy

question 54

Multiple Choice

Liu Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 13,000 of the components each year.The unit product cost of the component according to the company's cost accounting system is given as follows:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 8.80 \\\hline \text { Direct labor } & 5.80 \\\hline \text { Variable manufacturing overhead } & 1.60 \\\hline \text { Fixed manufacturing overhead } & 3.60 \\\hline \text { Unit product cost } & \$ 19.80 \\\hline\end{array}$$
Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,30% is avoidable if the component were bought from the outside supplier.In addition,making the component uses 1 minute on the machine that is the company's current constraint.If the component were bought,this machine time would be freed up for use on another product that requires 2 minutes on the constraining machine and that has a contribution margin of $5.20 per unit.When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component? (CIMA adapted)

• A) $22.40.
• B) $19.80.
• C) $17.28.
• D) $19.88.

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Definitions:

Semicircular Canals

Structures in the inner ear that are key to the vestibular system, helping to maintain balance and spatial orientation.

Balance

The state of having equilibrium, or the ability to maintain bodily equilibrium or to weigh decisions and actions evenly.

Sensations

The process by which sensory receptors receive stimuli from the environment, leading to immediate, simple experiences.

Perception

The process of organizing, interpreting, and giving meaning to sensory information.