Lindon Company uses 4,500 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $69,000 as follows:
Direct Materials...... $16,000
Direct Labor........ 18,000
Variable Manufacturing Overhead .....10,000
Fixed Manufacturing Overhead....... 25,000
Total Costs ....$69,000
An outside supplier has offered to provide Part X at a price of $11 per unit. If Lindon stops producing the part internally, one-third of the manufacturing overhead would be eliminated.
Required: Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.
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