Sapulpa Company currently manufactures all components of its product. The manager is trying to decide whether the company should continue to manufacture one of the parts or purchase it from an outside supplier, who would charge $15 per part. Fixed costs associated with manufacturing the part are unavoidable. Expected unit sales are 50,000. Sapulpa incurs the following cost per unit to manufacture the part:

Determine whether it is financially beneficial for Sapulpa Company to purchase the part from the outside supplier, and calculate the net benefit.

a. First, make a column for each decision alternative. Stop—Check!

b. Next, place the relevant costs and benefits of each alternative in the columns.
Stop—Check!

c. Finally, find the net benefit of the decision and determine which alternative results in higher profit. Stop—Check!
Stop—

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Direct materials (DM) Direct labor (DL) Variable overhead (VOh) Fixed overhead Per-unit cost $ 4.00 6.00 3.00 4.50 $17.50