A company purchase a product of 100,000 units from vendor whose production cost

Question

A company purchase a product of 100,000 units from vendor whose production cost is $ 9.25 per unit. As the company decided the build the product in-house. So, company have to pay for the fixed cost, variable cost, overhead charges, labour charges, raw material cost etc. The maximum cost associated with the fixed cost for the machinery, rent, electricity, water etc. would be at least $4 per unit. The labour cost would be $ 2 Dollar for each unit. The variable cost consists of the labour cost, raw material changes overhead charges etc. The raw material if purchased at the starting in the bulk then it would be $ 5 per unit. But if it is purchased in every 3 months then the cost may vary from $5 to $7 per unit. The overhead expenses like packing of the material or finishing the product etc. would cost for the $1 for each unit. So, most of the budget would be used for the production of the material but the quality would not be compromised in this case which would be benefit to the company growth. The maximum level of additional cost would be utilised in the purchase of the raw material and the transportation expenses.

Explanation / Answer

Currently, this part is being produced by outside vendor at the cost of $9.25 per unit. Your firm buys 100,000 units per year from this ve ndor. Management wants to bring production of this part "in -house". The accounting department adviced that additional costs will have to be incurred when the part is manufactured in-house". These costs are: fixed, labor, factory overhead, raw materials. What is the maximum level of those additional costs (S for all 100,000 unit) before this move cannot be justified on the economic basis?

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