YZ Company has been manufacturing its own widgets that are used in producing its final product. The cost of manufacturing 10,000 widgets is summarized below.

Direct materials $20,000

Direct labor $16,000

Variable factory overhead $9,000

Fixed factory overhead $15,000

Total manufacturing costs $60,000

A supplier offers to produce the widgets that XYZ needs for $5.30 plus freight costs of $0.50 per widget. If the company decides to buy from the supplier, 60% of the fixed factory overhead which represents depreciation and insurance costs will still continue. 40% will be avoided.

Should the company continue to make the widget or purchase it from the outside supplier?

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