Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows:
Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs.
A vendor has offered to supply the NJF1 component at a price of $175 per unit.
Instructions
(a) Should Larkin purchase the component from the outside vendor if its capacity remains idle?
(b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

Question

Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows:  
Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs.
A vendor has offered to supply the NJF1 component at a price of $175 per unit.
Instructions
(a) Should Larkin purchase the component from the outside vendor if its capacity remains idle?
(b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

Quizplus · Accepted Answer

The Answer of Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows:  
Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs.
A vendor has offered to supply the NJF1 component at a price of $175 per unit.
Instructions
(a) Should Larkin purchase the component from the outside vendor if its capacity remains idle?
(b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.