Redwood Industries needs 20,000 units of a certain part to use in its production cycle. The following information is available: Cost to Redwood to make the part:
Direct materials ........................................................... $ 4
Direct labor.................................................................... 16
Variable factory overhead ............................................. 12
Fixed factory overhead applied....................................... 6
Total............................................................................. $38
Cost to buy the part from Oak Co............................... $36
If Redwood buys the part from Oak instead of making it, Redwood could not use the released facilities in another manufacturing activity. Eighty percent of the fixed factory overhead applied will continue regardless of what decision Redwood makes.
1. In deciding whether to make or buy the part, what are the total relevant costs per unit to make the part?
2. What decision should Redwood make?
3. Suppose that Redwood was able to rent the released facilities to another company or use the released facilities to manufacture another product. How would that change your analysis?