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.
Components (outside purchase) ......... $ 120,000
Assembly labor ................. 300,000
Manufacturing overhead ............ 450,000
General and administrative overhead ........ 87,000
Total costs .................. $957,000

Assembly labor-consist of hourly production workers.
Manufacturing overhead is applied to production on a direct labor basis. Variable overhead costs very closely with direct labor dollars.
Fixed overhead .......... 50% of direct labor dollars
Variable overhead ......... 100% of direct labor dollars
Manufacturing overhead rate ..... 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.
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.