Tucker Corporation needs to purchase 80,000 components from a supplier each year. Management is determining if they could produce the unit in-house at a lower cost per unit than the $50 per unit currently being charged by the outside vendor. They determined the following costs would be incurred to produce an initial batch of 10,000 units:

The production manager determined that the direct labor is subject to an 80% learning curve. The initial production run is 10,000 units.
Required:
Should Tucker make or buy the 80,000 units? Assume that variable overhead cost varies directly with direct labor cost.

Question

Tucker Corporation needs to purchase 80,000 components from a supplier each year. Management is determining if they could produce the unit in-house at a lower cost per unit than the $50 per unit currently being charged by the outside vendor. They determined the following costs would be incurred to produce an initial batch of 10,000 units:
  
The production manager determined that the direct labor is subject to an 80% learning curve. The initial production run is 10,000 units.
Required:
Should Tucker make or buy the 80,000 units? Assume that variable overhead cost varies directly with direct labor cost.

Quizplus · Accepted Answer

The Answer of Tucker Corporation needs to purchase 80,000 components from a supplier each year. Management is determining if they could produce the unit in-house at a lower cost per unit than the $50 per unit currently being charged by the outside vendor. They determined the following costs would be incurred to produce an initial batch of 10,000 units:
  
The production manager determined that the direct labor is subject to an 80% learning curve. The initial production run is 10,000 units.
Required:
Should Tucker make or buy the 80,000 units? Assume that variable overhead cost varies directly with direct labor cost.

Tucker Corporation Needs to Purchase 80,000 Components from a Supplier