Question
HP Computer Corporation is trying to decide whether they should continue to make processors for their computers or buy the processors from an outside supplier.
HP Computer Corporation is trying to decide whether they should continue to make processors for their computers or buy the processors from an outside supplier. HP uses 11,700 processors each year. According to HP's accounting data, the unit product cost of the processor is shown below: Direct materials $ 7.50 Direct labor 4.50 Variable manufacturing overhead 0.30 Fixed manufacturing overhead 2.30 Unit product cost $ 14.60 Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the processors was purchased from the outside supplier. In addition, making the processor uses 2 minutes on the machine that is the company's current constraint. If the processor were purchased from the outside supplier, time would be freed up for use on another product that requires 4 minutes on this machine and that has a contribution margin of $3.90 per unit. When HP is deciding whether to make or buy the processor, what cost of making the processor should be compared to the price of buying the processor? (Round your intermediate calculations to 2 decimal places.)
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