Smith Company needs 1,000 units of a certain part for its manufacturing process. It can buy the part from Jones Company for $106. Smith Company's plant can manufacture the part for the following unit costs:
|
Direct materials
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$12
|
|
Direct manufacturing labor
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$48
|
|
Variable manufacturing overhead
|
$24
|
|
Fixed manufacturing overhead
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$30
|
|
Total
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$114
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If Smith Company buys the part from Jones Company instead of manufacturing it, 40 percent of the fixed manufacturing overhead will be avoided. Should they make it or buy it? Show your calculations.