Question - Make-or-Buy Decision
LaSalle Manufacturing had always made its components in-house. However, Jasper Component Works had recently offered to supply one component, C-430, at a price of $12 each. LaSalle uses 4,600 units of Component C-430 each year. The cost per unit of this component is as follows:
Direct materials $7.75
Direct labor 2.46
Variable overhead 1.24
Fixed overhead 4.00
Total $15.45
The fixed overhead is an allocated expense; none of it would be eliminated if production of Component C-430 stopped.
Required:
1. List the relevant costs for each alternative. If required, round your answers to two decimal places.
If LaSalle decides to purchase the component from Jasper, by how much will operating income increase or decrease?
2. Conceptual Connection: Which alternative is better?