Outsourcing Decision SE3 Will Company assembles products fro

Outsourcing Decision SE3. Will Company assembles products from a group of interconnecting parts. The com pany produces some of the parts and buys some from outside vendors. The vendor for Part X has just increased its price by 35 percent, to $10 per unit for the first 5,000 units and S9 per additional unit ordered cach year. The company uses 7,500 units of Part X cach year. Unit costs if the company makes the part are as follows. Direct materials Direct labor Variable overhead Variable selling costs for the assembled product 3.50 2.00 4.00 3.75 Should Will Company continue to purchase Part X or begin making it?

Solution

Variable selling costs for the assembled product will be incurred regardless of the fact whether the product is produced or manufactured. Thus this cost is ignored for the purpose of decision making as it is irrelevant cost.

Cost to manufacture:

Direct Material= $3.50

Direct Labour=$2.00

Variable overhead= $4.00

Total cost =$9.50×7500 uNits=$71250

If the product is bought from the market

=$10×5000units+ $9×2500units=$72500

Thus, savings in manufacture=$ 72500-$71250=$1250

Company should manufacture the product instead of buying from the market.

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