Jim Shorts Gym Shoe Company currently buys the inserts for his shoes for $7 per

Question

Jim Shorts Gym Shoe Company currently buys the inserts for his shoes for $7 per shoe (7 for the pair). They are forecasting to sell 7500 shoes. Jim Shorts brother Jean Shorts was responsible for validating if it would beneficial to make the inserts in house.   Based on the table below should they take the production in house? (Please explain and shows work)    The following are the numbers Jean calculated for in-house production

Per Unit Total Cost Direct Labor 1 $7,500 Direct Material 2 $15,000 Variable Overhead per Labor 0.5 $3,750 Annual Fixed Cost N/A $20,000 Total $46,250

Explanation / Answer

Cost of buying the insert for his shoes for 7500 units = 7 * 7500 = $52,500

Cost of in-house production for 7500 units = $ 46250

Since cost of in-house production for 7500 units is lesser thus Jim Short should produce inserts for shoes in house.

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