The screens for mobile phones are currently purchased from an outside supplier at a cost of $80 each by Futuristic Phones Ltd. The company is concerned about the quality of the screens it is buying as one in a 500 is found to be faulty within a year of using them to make mobile phones.

If the company decides to manufacture the screens, it would have to purchase new machines at a cost of $9 000 000. The new machinery would enable the company to produce its annual requirement of 600 000 screens and would have to be scrapped at the end of a 5-year useful life. The following costs per unit would be required to produce the screens (excluding the cost of the new machinery).

Required

(a) Should the company make or buy the screens for the mobile phones? Explain why.

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Direct materials Direct labour Variable factory overhead Fixed factory overhead- - allocated Total $ 20 12 24 40 $96 The allocated fixed factory overhead would be a reassignment of existing costs based on estimated sales volume.