Problem - Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:
Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
Question 1: What amount of the MNO production costs is avoidable?
Question 2: Should the company outsource MNO? Why or why not?
Question 3: What other items should the company consider before outsourcing any of the parts it manufactures?