$10 Question 3: Make versus buy. You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $75 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $40 direct labor $20 variable overhead fixed overhead $20 total $90 If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit? First, compute variable costs under MAKE versus BUY: MAKE BUY unit VC 70 75 total VC 70000 75000 If you outsource (BUY), the incremental revenue, costs, and profit are: how much each amount changes if you outsource Incremental revenue 0 Incremental VC -5000 X Incremental CM Incremental FC 0 Incremental profit -5000 Enter negative amounts with a minus sign, i.e., -1,000 not ($1,000). -5000 Should you outsource? NO - Outsourcing reduces profit by $5,000 YES - outsourcing reduces costs by $5,000