Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows:
|
Direct Materials |
$18,000 |
|
Direct Labor |
20,000 |
|
Variable Manufacturing Overhead |
12,000 |
|
Fixed Manufacturing Overhead |
30,000 |
|
Total Costs |
80,000 |
An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon stops producing the part internally, one-third of the manufacturing overhead would be eliminated.
Required:
Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting the outside supplier’s offer.