Lindon Company uses 5,000 units of Part X each year as a component in the assemb

ID: 2385560 • Letter: L

Question

Lindon Company uses 5,000 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 $80,000 as follows:
Direct Materials...............................................$18,000
Direct Labor......................................................20,000
Variable Manufacturing Overhead................... 12,000
Fixed Manufacturing Overhead....................... 30,000
Total Costs.......................................................80,000
An outside supplier has offered to provide Part X at a price of $13 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.

Explanation / Answer

Cost of Making

Cost of Buying

Outside Purchase Price

65,000

Direct Materials

18,000

Direct Labor

20,000

Variable Overhead

12,000

Fixed Overhead

10,000

Total

$60,000

$65,000

Annual advantage = 5000 dollars