A company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following: Per case Direct materials $ 40.00Direct labor 32.00Variable overhead 10.00Equipment depreciation 6.50Building rental 10.00Allocated fixed overhead 7.50 Total cost $106.00 Required:(1) Determine whether the company should make the cases or buy
them from the outside supplier.(2) What other factors, besides cost, should the company consider?
What will be an ideal response?
(1)Incremental cost to make the cases:
Variable costs:
| Direct materials | $ | 40.00 |
| Direct labor | 32.00 |
| Variable overhead | 10.00 |
| Total variable costs per unit | $ | 82.00 |
| Total variable costs (20,000 units * $82.00 per unit)……… | $1,640,000 |
| Depreciation | 130,000 |
| Building rent | 200,000 |
| Total incremental cost to make | $1,970,000 |
| Total cost to buy (20,000 units * $90 per unit)…………... | 1,800,000 |
If 20,000 cases are needed, the company should purchase them.
(2) The company also should consider such things as quality control, customer reactions, suppliers' dependability, and the availability and training of employees.
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