Retelsdorf Ltd manufactures tablet screens. Recently, the company has been producing slightly below 75% of capacity and management is considering how to use currently unused plant capacity. One proposal is to produce a component used in several of the company’s products that is currently being purchased from a supplier for $40 per unit. The company uses 20 000 of these components per year. The estimated cost of producing each component is as follows.

Required

(a) Should the company continue to purchase the component or produce it internally? What is the total cost differential involved?

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Direct materials Direct labour (1 hour @ $15) Factory overhead Total $ 14 15 15 $ 44 Factory overhead is applied to all products on the basis of direct labour hours. The expected capacity for the year is 300 000 direct labour hours. Fixed factory overhead for the year is budgeted at $1 800 000.