Question: A company is analyzing a make-versus-purchase situation for a component used in several products, and the engineering department has developed these data:
Option A: Purchase 10,000 items per year at a fixed price of $8.50 per item. The cost of placing the order is negligible according to the present cost accounting procedure.
Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials = $5.00 per item and direct labor = $1.50 per item. Manufacturing overhead is allocated at 200% of direct labor (= $3.00 per item). Based on these data, should the item be purchased or manufactured?