Currently when the part is being bought from outside, total cost incurred by the

Question

Currently when the part is being bought from outside, total cost incurred by the firm for buying from outside = $9.25 / unit x 100,000 units = $925,000

When the part is being made inside, the payment of $925,000 being made to the vendor will no longer be incurred.

Instead this amount can be spent inhose for purchase of material, overhead , raw material etc.

Thus till the point total cost incurred on account of material , overhead , raw material does not exceed $925,000 , it makes sense to make it in hose.

Once the cost exceeds $925,000 , it will not be economical to make it in house.

MAXIMIUM LEVEL OF ADDITIONAL COST WILL BE $925,000 BEFORE THE MOVE CANNOT BE JUSTIFIED ON ECONOMIC BASIS

MAXIMIUM LEVEL OF ADDITIONAL COST WILL BE $925,000 BEFORE THE MOVE CANNOT BE JUSTIFIED ON ECONOMIC BASIS

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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