Senior Company currently buys 35,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20 percent increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 35,000 units): $\begin{array}{lr}
\text { Direct materials } & \$ 16 \
\text { Direct labor } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } & 10 \
\text { Total } & \$ 50
\end{array}$
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Senior Company buy the part externally or make it internally?

Question

Senior Company currently buys 35,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20 percent increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 35,000 units): $\begin{array}{lr}
\text { Direct materials } & \$ 16 \
\text { Direct labor } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } & 10 \
\text { Total } & \$ 50
\end{array}$ 
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Senior Company buy the part externally or make it internally?

Quizplus · Accepted Answer

The Answer of Senior Company currently buys 35,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20 percent increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 35,000 units): $\begin{array}{lr}
\text { Direct materials } & \$ 16 \
\text { Direct labor } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } & 10 \
\text { Total } & \$ 50
\end{array}$ 
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required:
Should Senior Company buy the part externally or make it internally?

Senior Company Currently Buys 35,000 Units of a Part Used