Case Study:

Assume that a firm has prepared the following cost estimates for the manufacture of a sub assembly component based on an annual production of 8,000 units.

Per Unit

Total

Direct materials

$5

$40,000

Direct labor

$4

$32,000

Variable factory overhead applied

$4

$32,000

Fixed factory over head applied (150% of direct labor cost)

$6

$48,000

Total Cost

$19

$152,000

The supplier has offered to provide the subassembly at a price of $16 each.Two-thirds of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision.Should the company buy or make the product?