What are the initial step is to determine the cost per unit of the variable cost?
Introduction
The initial step is to determine the cost per unit of the variable costs. The email license is 22740 3790 emails. Each email takes $6 dollars for the license while virus protection license costs 1.6 per unit and the miscellaneous cost per unit for 3790 units is $3.6. To make is to perform the service in the organization as part of the company operations but to buy refers to outsourcing the operations of the department to other specialized companies. The only costs that would be applicable when the company opts to outsource the services is the $12.4 dollars chargeable per email and the unavoidable variable virus protection license of $1.6 dollars for 4240 emails and the unavoidable fixed costs of 12734 and the $6685.5 dollars payable to the intern. The alternative use of resources due to the buying of the product is the cost saving for the buy option hence its deducted from the total costs of the buy option and it amounts to $4900.
| Details | Total units | Total costs | Cost /unit | Make (4240) | Buy (4240) |
| Email License | 3790 | 22740 | 6 | 25440 | |
| Virus Protection License | 3790 | 6064 | 1.6 | 6784 | 6784 |
| Miscellaneous | 3790 | 13644 | 3.6 | 15264 | |
| Fixed Overhead | 31836 | ||||
| Avoidable Fixed Costs | 12416.50 | ||||
| Unavoidable(6685.5+12734) | 19419.50 | 19419.50 | |||
| Purchase (12.4 x 4240) | 52576 | ||||
| Alternative use of resources | -4900 | ||||
| 79324 | 73879.5 |
The rest of the variable costs per unit is multiplied by the total number of mailboxes that would be available the following month and which totaled to 4240. Email license per unit costs is 6 multiplied by the 4240 mail boxes equal to $25440 dollars. Virus protection and miscellaneous also amount to 6784 and 15264 respectively for the make option. The total fixed costs for the make option amounts to $31836. The totals for the make option amounts to 79324 and 73879.50 for the buy option. To obtain the difference between the make and the buy option the total buy costs is subtracted from the make costs which gives a positive difference of 5444.50.
| Cost function = |
| C= a + bx |
| C = 31836 + 11.2x |
| The Make costs | 79324 | ||
| The buy costs are less than the make costs by | 5444.50 | ||
| (79324 – 73879.50) | |||
| The buy price = | 73879.50 | ||
| Avoidable fixed costs = | 12416.50 | ||
| Unavoidable Fixed costs | 19419.50 | ||
| Alternative use of idle resources | 4900 |
