Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $37 per part plus another $4 for shipping and other purchasing-related costs. The company will need 29,300 of these parts in the next year and is considering making the part internally. After performing a capacity analysis, Sycamore determined that it has sufficient unused capacity to manufacture the 29,300 parts but would need to hire a manager at an annual salary of $87,900 to oversee this production activity. Estimated production costs are determined to be:
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| Direct material |
$ |
22 |
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| Direct labor |
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10 |
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| Variable overhead |
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5 |
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| Fixed overhead (includes manager at $3 per unit) |
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8 |
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| Total unit cost |
$ |
45
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| (a) |
Identify the relevant costs to make this part internally. (Select all that apply.) |
rev: 05-11-2011
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Historical cost |
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Direct labor |
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Direct material |
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Variable overhead |
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Fixed overhead |
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New manager's salary
| (c) |
What are the other factors that Sycamore Company should consider in deciding to make the part internally? (Select all that apply.)
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rev: 05-11-2011
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Total sales quantity. |
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The potential for improved control over the availability of the parts by having it when needed and the potential for improved quality of the parts.
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Since Sycamore Company is considering the use of currently available capacity, it should evaluate any relevant opportunity costs of using this capacity for more profitable activities.
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