Each year, Basu Company produces 18,000 units of a component used in microwave ovens. An outside supplier has offered to supply the part for $1.38. The unit cost is:
Direct materials ... $0.78
Direct labor ...... 0.34
Variable overhead ... 0.13
Fixed overhead ... 2.75
Total unit cost ...... $4.00
1. What are the alternatives for Basu Company?
2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production and of external purchase.
3. Which alternative is more cost effective and by how much?
4. What if $18,540 of fixed overhead is rental of equipment used only in production of the component that can be avoided if the component is purchased? Which alternative is more cost effective and by how much?