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Harmony is currently producing 100 units of a necessary component part by incurring p60,000 in direct materials, p12,500 in direct labor, p22,500 in variable overhead, and p15,000 in fixed overhead. Harmony can purchase the component externally for p95,000 and only p2,500 of fixed manufacturing costs cannot be avoided (the rest are avoidable). How much savings will harmony realize in buying instead of making the component?

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By taking the difference between the two costs, we conclude that buying instead of making the component, she saves $12,500

How much will she save?

If she makes the components, the cost is:

$60,000 + $12,500 + $22,500 + $15,000 = $110,000

On the other hand, if she buys the components, the cost will be:

$95,000 + $2,500 = $97,500

To find how much did she saves, we need to find the difference between the two costs. That is just:

$110,000 - $97,500 = $12,500

This means that by buying instead of making the component, she saves $12,500

If you want to learn more about costs, you can read:

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