Example

The estimated costs of producing 6,000 units of a component are:

Per Unit Total
Direct Material $10 $60,000
Direct a!or " #",000
$pplied %aria!le &actor' ()erhead * +#,000
$pplied &ixed &actor' ()erhead 1, -,,000
$1.5 per direct labor dollar
$.* $,.#,000
The same component can !e purchased from mar/et at a price of $,* per unit0 1f the
component is purchased from mar/et, ,+2 of the fixed factor' o)erhead 3ill !e
sa)ed0
4hould the component !e purchased from the mar/et5
4olution
Per Unit Total
Ma/e 6u' Ma/e 6u'
Purchase Price $,* $1-#,000
Direct Material $10 $60,000
Direct a!or " #",000
%aria!le ()erhead * +#,000
7ele)ant &ixed ()erhead . 1",000
Total 7ele)ant 8osts $.0 $,* $1"0,000 $1-#,000
Difference in &a)or of 6u'ing $1 $6,000
Written by Irfanullah Jan