Instead of making the part, Bay has an opportunity to purchase the part from an outside company for $65 per unit. Should the company accept the offer, or should it continue to manufacture the part?
Bay Corporation is manufacturing a part that is used in its finished product. The costs for each unit of the part follow:
Direct materials ................................................ $27
Direct labor ..................................................... 28
Manufacturing overhead:
Variable costs .......................................$18
Fixed costs ............................................ 8 ...... 26
Total cost ....................................................... $81
The fixed overhead is based on $800,000 of fixed costs to manufacture 100,000 parts per year. If the part is not manufactured, fixed costs will be reduced by approximately $400,000 per year.