Rathbone Industries produces and sells an instrument used in hospital monitoring systems. The instrument uses a specialized sensor that Rathbone currently purchases from Norfolk Electronix. Norfolk charges Rathbone $94 per sensor for the 12,000 sensors Rathbone requires annually.

Some manufacturing capacity recently opened up at Rathbone, and engineers at the company believe that it would be possible for Rathbone to produce the sensor internally. Unit cost estimates to make the sensors are shown here: 

Of the $20-per-unit overhead cost, $8 is for variable overhead specifically used by the sensor. The remaining $12 unit cost is fixed overhead that remains from the previously used capacity. Forty percent of the fixed overhead can be avoided if the sensor is produced outside the firm by Norfolk Electronix. 

Required

a. Should Rathbone Industries make the sensor (insource) or continue to purchase it from Norfolk Electronix (outsource)? Why?

b. What nonfinancial factors would you recommend managers at Rathbone consider before making their decision?

Transcribed Image Text:

Direct materials Direct labor.... Manufacturing overhead Total unit cost... $37 42 20 $99