Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should .

Andrews Co.

The company should .

should make the part.

Explanation:

a) Data and Calculations:

Costs to make Part XYZ:

                                        Cost Per Unit       Total

Variable manufacturing cost  $12          $240,000

Supervisor salary                     $3             $60,000

Depreciation                             $1             $20,000

Allocated fixed overhead        $7           $140,000

Units to be made or bought = 20,000 units

Cost to buy Part XYZ = $18 per part.

Relevant costs:

                                              Make          Buy         Difference

Variable manufacturing cost  $12

Supervisor salary                     $3

Total relevant cost per unit   $15            $18               $3

Total costs                      $300,000   $360,000     $60,000

b) There is a cost-saving of $60,000 when Part XYZ is made internally.  The cost of depreciation is not relevant in the decision since the equipment has no salvage value or any other use.  Similarly, the fixed overhead will still be incurred, no matter the alternative chosen by the company.

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