Terrace Company currently manufactures a sub-assembly for its main product. The costs per unit are as follows.

Ballen Co. has contacted Terrace Company with an offer to sell it 5000 sub-assemblies for $55 each.

Required
(a) Why is it important to identify whether any of the fixed overhead is avoidable or unavoidable in order to assess the outsourcing of the sub-assembly? Explain.
(b) Should Terrace Company make or buy the sub-assemblies? Create a schedule that shows the total quantitative differences between the two alternatives. Assume all fixed overhead is unavoidable.
(c) If Terrace Company was able to eliminate $50 000 of fixed overhead, would it change your decision in (b)? Explain and show your calculations.
(d) What qualitative factors should the accountants and managers of Terrace Company consider in their ‘make or buy’ decision?

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Direct materials Direct labour Variable overhead Fixed overhead (allocated) Total $4.00 30.00 15.00 25.00 $74.00