Problem - Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:
Direct materials $ 65,000
Direct manufacturing labor 45,000
Variable support costs 55,000
Fixed support costs 60,000
Total costs $225,000
Louder Company has the option of purchasing part MNO from an outside supplier at $19.95 per unit. If MNO is outsourced, 35% of the fixed costs cannot be immediately converted to other uses.
What amount of the MNO production costs is avoidable?
Should the company outsource MNO? Why or why not? For full credit, show all calculations.
What other items should the company consider before outsourcing any of the parts it manufactures?