Senior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20% increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): $$\begin{array} { l r }
\text { Direct materials } & \$ 16 \
\text { Direct labour } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } & { 10 } \
\text { Total } & \underline { \$ 50 }
\end{array}$$ 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 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20% increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): $$\begin{array} { l r } 
\text { Direct materials } & \$ 16 \
\text { Direct labour } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } &  { 10 }  \
\text { Total } & \underline { \$ 50 }
\end{array}$$ 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 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20% increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): $$\begin{array} { l r } 
\text { Direct materials } & \$ 16 \
\text { Direct labour } & 12 \
\text { Variable overhead } & 12 \
\text { Fixed overhead } &  { 10 }  \
\text { Total } & \underline { \$ 50 }
\end{array}$$ 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 30,000 Units of a Part Used