Illinois Equipment Corporation is currently manufacturing a part that goes into its main product. Each year 6,000 of these parts are used. Cost data for the past year that relates to the 6,000 parts are given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part for $69 per unit, plus a shipping charge of $6 per unit. The plant now used by Illinois to manufacture the part would not be used to capacity within the foreseeable future if the part is purchased outside.
Variable costs:
Direct materials ..................................... $240,000
Direct labor .......................................... 180,000
Variable overhead costs ........................... 18,000
Fixed overhead costs ............................... 30,000
INSTRUCTIONS
1. Prepare an analysis comparing the unit cost of manufacturing the part with the unit cost of purchasing it.
2. What other factors are important in making the decision to accept or reject the offer?
Analyze: What is the highest cost that Illinois Equipment Corporation should consider to pay for the part in an outside purchase?