Question: AJ Corp. makes a small part needed in the production of its major product. The management accountant and purchasing manager have discussed the possibility of

AJ Corp. makes a small part needed in the production of its major product. The management accountant and purchasing manager have discussed the possibility of buying this part from Worldwide Manufacturing. The following per-unit production cost data are available:

Direct material $12

Direct labour 3

Variable overhead 6

Fixed overhead (applied) 8

Total cost $29

===

Cost per unit to buy:

Purchase price

(subject to 2% discount) $25

Freight charges 1

Total cost $26

===

a. If AJ always takes advantage of purchase discounts, should the company make or buy the part? Show calculations to support your answer.

b. If AJ buys the part from Worldwide, it has no alternative use of the equipment now used for this production. Thus, 40% of the fixed overhead will continue even if production of the part stops. Should the company make or buy the part? Show calculations to support your answer.

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