5-04

VIRGINIA CO.
VIRGINIA Co. is currently producing 20,000 components at a cost of $16 per unit.
this level of production, total fixed overhead costs are $100,000.

At

An outside supplier has offered to sell 20,000 units to VIRGINIA for $14 a unit.
The normal production per-unit costs are shown below:
Direct materials
Direct Labor
Variable overhead
Fixed overhead

Per Unit
$
2
4
5
5
$ 16

REQUIRED:
1. Should VIRGINIA make or buy the component?
Outsource
Cost
$14

Benefit
2+4+5= $11

Make better $3 a unit. X 20,000= $60,000

Consider the following two situations INDEPENDENTLY

2. Assume the space used to produce the component could be leased to another
company for $75,000. What decision should be made?
Cost
$14
X20,000
$280,000

Benefit
Better to buy $15,000 different
$11
x20,000
$220,000
75,000
$295,000

3. What would the answer be if 80% of the fixed costs were avoidable if VIRGINIA
outsourced instead of making it in-house?

280,000
280,000
$20,000

220,000
80,000
300,000 avoid costs It is better to buy by