Question: Company Y is evaluating whether it should continue manufacturing a component or buy it from an outside supplier. This component costs $70 to manufacture. The

Company Y is evaluating whether it should continue manufacturing a component or buy it from an outside supplier. This component costs $70 to manufacture. The total cost of production is given in the table below

Direct material $24,000

Direct Labour $18,000

Direct Labour hours 900

Manufacturing overhead Variable $20,000

Fixed manufacturing overhead $30,000

Units completed 5000

The company uses 5000 components per year . A supplier company X offered to provide this component for $65.00 per component , some managers felt they could reduce the cost by buying from the outside supplier .

If company buys the component it will avoid $ 8.00 per unit and $ 2.00 on VOH. The company can rent the unused portion of the factory for $15,000.

REQUIRED

Should the company make or buy the component ?

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