Kimball Enterprises manufactures a product which contains a part that they have always purchased from a supplier for $60 each. Kimball recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the part instead of buying it. The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost.
Direct Materials $38.00
Direct Labor 15.00
Overhead (fixed and variable) 11.25
Total $64.25
The required volume of output to produce the parts will not require any incremental fixed overhead. Incremental variable overhead cost is $2.00 per unit. Should Kimball make or buy the parts?
Show how you calculated your answer.