Assume a company is considering using available space to make 10,000 units of a component part that it has been buying from a supplier for a price of $41.25 per unit. The company’s accounting system estimates the following costs of making the part:

	Per Unit	10,000 Units per Year
Direct materials	$ 19	$ 190,000
Direct labor	12	120,000
Variable manufacturing overhead	2	20,000
Fixed manufacturing overhead, traceable	8	80,000
Fixed manufacturing overhead, allocated	4	40,000
Total cost	$ 47	$ 450,000

One-half of the traceable fixed manufacturing overhead relates to a supervisor that would have to be hired to oversee production of the part. The remainder of the traceable fixed manufacturing overhead relates to depreciation of equipment that the company already owns. This equipment has 20,000 units of unused capacity, no resale value, and it does wear out through use. The allocated fixed manufacturing overhead relates to general overhead costs, such as the plant manager’s salary, lighting, heating and cooling costs, and plant insurance costs. What is the financial advantage (disadvantage) of making 10,000 units instead of buying them from the supplier?

Answer rating: 100% (QA)

1 Cost of Making Units Internally Direct materials cost 19 per unit 10000 units 190000 Direct ... View the full answer