Burt Company makes a product that includes a component part, Item XJ7. Presently, the company purchases XJ7 from an outside supplier for $48 each. Burt Company is considering manufacturing XJ7 itself. Estimated total manufacturing costs for the yearly requirement of 1,000 units of XJ7 follow. Burt anticipates producing XJ7 in 5 batches.

 

Required:

A. Should Burt Company make or buy component XJ7?

B. If the company could reduce the number of batches needed from 5 to 2, would your answer change? Why or why not?

C. Discuss the additional factors Burt should consider before making this decision.

Direct materials Direct labor $ 7,000 8,000 5,000 Unit-related overhead Batch-related overhead 30,000 Facility-sustaining overhead* 36,000 Total $86,000 *Facility-sustaining overhead is allocated to each product line throughout the company based on relative sales in dollars.