Question: (Outsourcing) Fibre Technologies manufactures ?berglass housings for portable generators. One part of a housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually. Company management is considering purchasing the latch from an external vendor. The following data are available for mak- ing the decision:
| Cost per unit to manufacturer |
| Direct Material |
$1.60 |
| Diretc Labour |
1.36 |
| Variable Overhead |
0.72 |
| Fixed Overhead- applied |
1.12 |
| Total cost |
$4.80 |
| Cost per unit to purchase |
| Purchase Price |
$3.92 |
| Freight Charges |
0.08 |
| Total Cost |
$4.00 |
a. Assuming that all of Fibre Technologies' internal production costs are avoidable if the company purchases rather than makes the latch, what would be the net annual cost advantage to purchasing the latches?
b. Assume that some of Fibre Technologies' fixed overhead costs could not be avoided if it purchases rather than makes the latches. How much of the fixed overhead must be avoidable for the company to be indi?erent as to making or buying the latches?