Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $85 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $30 direct labor $10 variable overhead $10 fixed overhead total $30 $110 If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit? First, compute variable costs under MAKE versus BUY: unit VC total VC MAKE BUY If you outsource (BUY), the incremental revenue, costs, and profit are: Incremental revenue Incremental VC Incremental CM Incremental FC Incremental profit how much each amount changes if you outsource Enter negative amounts with a minus sign, l.e., -1,000 not ($1,000). Should you outsource? YES outsourcing reduces costs by $5,000 NO - outsourcing reduces profit by $5,000