The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside.
$\begin{array}{lr}
\text { Direct Materials } & \$ 60,000 \
\text { Direct Labor } & 65,000 \
\text { Variable Overhead Costs } & 2,500 \
\text { Fixed Overhead Costs } & 5,000
\end{array}$
Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.

Question

The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside.
$\begin{array}{lr}
\text { Direct Materials } & \$ 60,000 \
\text { Direct Labor } & 65,000 \
\text { Variable Overhead Costs } & 2,500 \
\text { Fixed Overhead Costs } & 5,000
\end{array}$ 
Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.

Quizplus · Accepted Answer

The Answer of The Alvarado Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 2,500 of these parts are used. Cost data for the past year that relates to the 2,500 parts is given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $45 a unit, plus a shipping charge of $2 a unit. The plant capacity now used by Alvarado to manufacture the part would not be used within the foreseeable future if the part is purchased outside.
$\begin{array}{lr}
\text { Direct Materials } & \$ 60,000 \
\text { Direct Labor } & 65,000 \
\text { Variable Overhead Costs } & 2,500 \
\text { Fixed Overhead Costs } & 5,000
\end{array}$ 
Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it. Based on the analysis, indicate the decision that should be made.

The Alvarado Equipment Corporation Is Currently Manufacturing a Part That