Hadley Inc. , makes a line of bathroom accessories.Because of a decline in sales, the company has 10, 000 machine hours of idle capacity available each year.This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process.Hadley needs 5, 000 units of this component each year.At present, the component is being purchased from an outside supplier at $7.50 per unit.Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18, 000 per year.Already existing fixed costs that would be allocated to this part amount to $300, 000 per year. What would the annual cost of additional supervision have to be in order for Hadley to be indifferent between making or buying the component? (Assume everything else remains the same. )

Question

Quizplus · Accepted Answer

Cost to buy the part = 5, 000 units × $7.50 per unit = $37, 500
Cost to make the part = Variable production cost + Additional supervisory costs
= (5, 000 units × $4.10 per unit)+ Additional supervisory costs
= $20, 500 + Additional supervisory costs
The company would be indifferent between making the part or buying it on the outside market if the cost of making it equals the cost of buying it.
Cost to buy the part = Cost to make the part
$37, 500 = $20, 500 + Additional supervisory costs
Additional supervisory costs = $37, 500 - $20, 500 = $17, 000