Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

Question

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs:  The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

Quizplus · Accepted Answer

Outsourced cost of the relay switches:
$20 per unit × 5,000 units = $100,000
Relevant cost for expected production of the relay switches:
 11ea7feb_d1d8_0ac4_a768_1928c88a15a0_TB3570_00_TB3570_00_TB3570_00 The allocated factory-level costs are not relevant because the company will incur them whether it accepts or rejects the special order.
If the company decides to make the parts, total costs will be $10,500 (= $110,500 − $100,000) more than if the switches are purchased.

Benitez Company Currently Outsources a Relay Switch That Is a Component