Silicon Valley Computer Company is currently manufacturing a part that goes into its main product. Each year, 1,500 of these parts are used. Cost data for the past year that relate to the 1,500 parts are given below. Fixed costs are allocated on the basis of direct labor hours. An outside company has offered to supply the part at $88 per unit, plus a shipping charge of $5 per unit. The plant capacity now used by Silicon Valley to manufacture the part would not be used in the foreseeable future if the part is purchased outside.
Variable costs:
Direct materials ............................... $90,000
Direct labor .................................... 37,500
Variable overhead ............................ 15,000
Fixed overhead costs ....................... 27,000
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: If Silicon Valley Computer could negotiate a $1 reduction in shipping charge per unit from the outside supplier, what is the per unit difference between the cost to make and the cost to purchase?