#32

Make or Buy Decision

The Apple company makes 7,000 units of Part 12A each year. The company's financial department reports the following costs of producing Part12A at this level of activity:

	Per Unit
Direct materials	$3.40
Direct labor	$2.40
Variable manufacturing overhead	$7.20
Supervisors salary	$3.60
Depreciation of special equipment	$8.90
Allocated general overhead	$4.50

An outside supplier has offered to produce Part 12A and sell it to the company for $15.50 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make Part 12A was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $5,000 of these allocated general overhead costs would be avoided. (1). What is the relevant cost if the company makes Part 12A internally? (6 points)

(2). What is the cost if the company buy from the outside supplier? (3 points)

(3). Should outside suppliers offer be accepted? Why? (4 points)

Please show all the computations.