Truman company assembles products from a group of interconnecting parts. the com

Question

Truman company assembles products from a group of interconnecting parts. the company produces some of the parts and buys some from outside vendors. the vendor for part y has just increased its price by 35% to $5 per unit for the first 5,000 units and $4.50 per additional unit ordered each year. the company uses 7,500 units of part y each year, Unit costs of the company makes the part are as follows:

Direct materials: $1.75
direct labor: $1.00
variable overhead: $2.00
variable selling costs for the assembled product: $2.00

should Truman company continue to purchase part y or begin making it

Explanation / Answer

The company should begin to make the part.

Truman Company Outsourcing Decision Incremental Analysis Make Part Y Buy Part Y Difference in favor of making part Costs to make the part: Direct materials (7,500 * $1.75) $13,125.00 $-   $-13,125.00 Direct labor(7,500*1) 7,500.00 0 $-7,500.00 Variable overhead(7,500*$2) 15,000.00 0 $-15,000.00 Costs to buy the part: 5,000*$5 0 25,000.00 $25,000.00 2,500*$4.50 0 11,250.00 $11,250.00 Totals $35,625.00 $36,250.00 $625.00

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