A company needs to determine whether a component used in sev

A company needs to determine whether a component used in several products should be purchased from a supplier (Option A) or manufactured in house (Option B). Option A: Purchase 10,000 items per year at a fixed price of $8.03 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials = $5.19 per item and direct labor = $1.41 per item. Manufacturing overhead is allocated at 200% of direct labor (= $2.82 per item). The total cost of Option A is $ . The total cost of Option B is $ . Should the item be purchased or manufactured Choose the correct answer below. The item should be purchased. The item should be manufactured.

Solution

Total cost of option A = No. of items to be purchased per year*price per item

Total cost of option A = 10000*8.03

Total cost of option A =$80300

Total cost of option B = No. of items to be manufactured*(Direct material cost per item + Direct labor cost per item + manufacturing overhead per item)

Total cost of option B = 10000*(5.19+1.41+2.82)

Total cost of option B = $94200

On the basis of above cost involved with option A & B,

Items should be purchased.