The make or buy decision In addition to the product cost information for Lakeside, Inc., in Mini-Exercise 16.1, product engineering has determined that a certain part of the product conversion process could be outsourced. Raw material costs would not be affected, but direct labor and variable overhead costs would be reduced by 30%. No other opportunity is currently feasible for unused production capacity.
In Mini-Exercise 16.1, Lakeside, Inc., produces a product that currently sells for $36 per unit. Current production costs per unit include direct materials, $10; direct labor, $12; variable overhead, $5; and fixed overhead, $5. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit.
Should Lakeside outsource part of the conversion process at a cost of $4 per unit?