Casting Technology Resources (CTR) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $68.00 per unit last year, CTR’s management has asked for an estimate of the cost of manufacturing the pump in CTR’s facilities. CTR makes stampings and castings and has little experience with products requiring assembly.

The engineering, manufacturing, and accounting departments have prepared a report for management that includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would be needed.

The report states that total costs for 10,000 units are estimated at $957,000, or $95.70 per unit. The current purchase price is $68.00 per unit, so the report recommends continued purchase of the product.

Required: Was the analysis prepared by Casting Technology Resources’ engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct?
Explain your answer and include any supporting calculations you consider necessary.

Components (outside purchases).. Assembly labor* Manufacturing overhead*. General and administrative overhead Total costs............. *Assembly labor consists of hourly production workers. $120,000 300,000 450,000 87,000 $957,000 *Manufacturing overhead is applied to products on a direct-labor-dollar basis. Variable-overhead costs vary closely with direct-labor dollars. Fixed overhead Variable overhead Manufacturing-overhead rate 50% of direct-labor dollars 100% of direct-labor dollars 150% of direct-labor dollars *General and administrative overhead is applied at 10 percent of the total cost of material (or components), assembly labor, and manufacturing overhead.