Glass Tech manufactures fiberglass housings for portable generators. One part of the housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually. Company management is considering purchasing the latch from an external vendor. The following data are available for making the decision:
Cost per Unit to Manufacture________________
Direct material ............. $ 1.40
Direct labor ............ 1.36
Variable overhead .......... 0.72
Fixed overhead—applied ........ 1.12
Total cost .............. $ 4.60
Cost per Unit to Purchase___________________
Purchase price ............ $ 3.92
Freight charges ........... 0.08
Total cost .............. $ 4.00
a. Assuming that all of Glass Tech’s internal production costs are avoidable if the company purchases rather than makes the latch, what would be the net annual cost advantage to purchasing the latches?
b. Assume that some of Glass Tech’s fixed overhead costs could not be avoided if it purchases rather than makes the latches. How much of the fixed overhead must be avoidable for the company to be indifferent as to making or buying the latches?