Make-or-buy and opportunity cost Premier Company manufactures gear model G37, which is used in several of its

Question:

Make-or-buy and opportunity cost Premier Company manufactures gear model G37, which is used in several of its farm-equipment products. Annual production volume of G37 is 20,000 units. Unit costs for G37 are as follow:

Direct materials costs.... $55

Direct labor costs...... 30

Variable overhead costs..... 25

Fixed overhead costs...... 15

Total costs.......... $125

Alternatively, Premier can purchase gear model G37 from an outside supplier for $120 per unit. If G37 is outsourced, Premier can use the facility where G37 is currently manufactured for production of another gear—model G49. This would save Premier $113,000 in facility rental and other costs presently incurred.

Required

Should Premier make or buy G37? By how much will Premier be better off by choosing your decision rather than the alternative?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...