Baron Company incurs the following annual costs in producing 25,000 ignition switches for motor scooters.
|
Direct Materials |
$50,000 |
|
Direct Labor |
75,000 |
|
Variable manufacturing overhead |
40,000 |
|
Fixed manufacturing overhead |
60,000 |
|
Total manufacturing costs |
$225,000 |
Instead of making its own switches, Baron Company might purchase the ignition switches at a price of $8 per unit. “What should management do?”
Assume that through buying the switches, Baron Company can use the released productive capacity to generate additional income of $28,000 from producing a different product. This lost income is an additional cost of continuing to make the switches in the make or buy decision.