(Make-or-buy decision) The Closet Organizer Company manufactures vinyl-clad wire baskets that are used as components in modular storage systems. Each basket requires two to six standard fasteners to attach it to other modular com¬ ponents or structural members of closets. Historically, the company has pro¬ duced the fasteners. The costs to produce a fastener (based on capacity operation of 4,000,000 units per year) are

The fixed factory overhead includes $80,000 of depreciation on equipment for which there is no alternative use and no market value. The balance of the fixed factory overhead pertains to the salary of the production supervisor. Al¬ though the supervisor of fastener production has a lifetime employment contract, she has skills that could be used to displace another manager (the supervisor of floor maintenance) who draws a salary of $15,000 per year but is due to retire from the company.
The Moulson Fastener Corporation has recently approached Closet Or¬ ganizer Company with an offer to supply all required fasteners at a price of $.065 per unit. Anticipated sales demand for the coming year will require 4,000,000 fasteners.

a. Identify the costs that are relevant in this make-or-buy decision.

b. What is the total annual advantage or disadvantage (in dollars) of buying the fasteners rather than making them?

c. What qualitative factors should be taken into account in this make-or-buy decision?LO1

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Direct materials Direct labor Variable factory overhead Fixed factory overhead Total $.03 .01 .01 .03 $.08