Make or Buy

Smith Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $24

Funkhouser Company has contacted Smith with an offer to sell it 5,000 of the subassemblies for $20 each. If Funkhouser makes the subassemblies, $5 of the fixed overhead per unit will be allocated to other products.

Required:

a. Should Smith make or buy the subassemblies? Explain your answer. What would be the impact on Net Income? (Make table)

b. What if Smith could rent the space currently used to manufacture the subassemblies for $15,000. What should they do now? What is the impact on Net Income? (Make table)

c. What other factors should Smith consider in making this decision?