Eaton Companies:
Total Cost for 50,000 Units Cost per Unit
Direct Material $400,000 $8
Direct Labor 300,000 6
Variable Factory Overhead 150,000 3
Fixed Factory Overhead 300,000 6
Total Manufacturing Costs 1,150,000 23
Another manufacturer has offered to sell the same part to Eaton for $20 each. The fixed overhead consists of depreciation, property taxes, insurance & supervisory salaries. All the fixed overhead would continue if Eaton bought the component except that the cost of $100,000 pertaining to some supervisory personnel could be avoided.
If the capacity now used to make parts becomes idle if the parts are purchased, should Eaton buy or make the parts?
Assume the capacity now used to make parts will either A. be rented for $65,000 or B. be used to make oil filters that will yield a profit contribution of $200,000. Should Eaton buy or make the part?