Drakeford Company produces some of the parts they use and they buy some from out

Question

Drakeford Company produces some of the parts they use and they buy some from outside vendors. The vendor for part A has just increased its price to $10 for the first 5,000 units; $15 for the next 5,000 units ; and $20 for more than 10,000 units per year. The company uses 8,000 units of part A each year. Unit costs if the company makes the part are as follows: Direct materials $3.50 Direct labor 3.00 Variable overhead 4.00 Variable selling costs for the assembled product 3.75 Should Drakeford Company continue to purchase part A or begin making it?

Explanation / Answer

total cost if purchased from outside = 10*5000+15*3000 = $95000

if the company make the product of its own

total cost = (3.5+3+4+3.75)*8000 = $114000

as 114000>95000

so company should buy the prts from outside vendors

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