Interdesign uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows:
Direct materials................................$70.00
Direct labour....................................50.00
Overhead.......................................130.00
Total...........................................$250.00
Overhead costs include variable material handling costs of $8, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labour dollars and consist of 50% variable costs and 50% fixed costs.
A vendor has offered to supply the IMC2 component at a price of $220 per unit.
Instructions
Answer the following questions:
(a) Should Interdesign purchase the component from the outside vendor if Interdesign's capacity remains idle?
(b) Should Interdesign purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Interdesign need to make an accurate decision? Show your calculations.
(c) What are the qualitative factors that Interdesign will have to consider when making this decision?