Phonegrip Company manufactures mobile phone holders. Phonegrip currently buys a magnet for its phones for $0.90 per unit. Phonegrip’s president asked for cost estimates for making this product, and received the following report:
Direct materials: $0.37 Direct labour: $0.15 Variable overhead: $0.18 Fixed overhead: $0.40.
Total manufacturing cost per unit: $1.10 If Phonegrip makes the magnet, production would take place in its machine shop. No additional plant and equipment would be necessary; however, the company would have to hire someone to inspect the magnets before they could be used to produce the company’s other products. The inspector’s salary would be $25 000 per year.
Required:
a Calculate the incremental costs of making and of buying the magnet in quantities of 80 000 units per year. Should the company make the magnet or buy it?
b Calculate the incremental costs of making and buying the component in quantities of 40 000 units per year. Should the company make the component or buy it?
c How many units of the component would have to be produced so that the total costs of making them would be equal to the total costs of buying them?