Limos Mfg. has been manufacturing furniture sets and is considering whether to make or outsource its own seat cushions needed for its chairs. The expected price of the cushions is P50 per unit.
If it continues to produce the company would incur the following unit cost: Direct materials P13, Direct Labor P15, Variable overhead 5, Fixed overhead (based on the average production requirement of 10,000 units) P20 for a total of P53.
Let us assume that materials and labor costs are expected to increase by 20% next period. Factory overhead costs will remain the same, except that 40% of the fixed overhead will be eliminated in case the company decides to buy seat cushions from other suppliers. Moreover, the facilities presently being used in the manufacture of seat cushions can be utilized to manufacture another part of the main product in case such facilities become vacant when the company decides to stop producing the seat cushions. The alternative use of resources would result in cost savings of P100,000. Assume further that the company’s requirement for seat cushions is expected to increase by 4,000 units next period.

MAKE or BUY?