Question: Suppose that a division of Bose makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just in time production system. All labor is considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume. Production costs for 100,000 units of the component are as follows:
Direct materials dollar 300,000 Factory overhead indirect labor $80,000Supplies 30,000 Allocated occupancy cost 40,000 150,000Total cost dollar 450,000A small, local company has offered to supply the components at a price of $3.30 each. If the division is continued its production of the component, it would save two-thirds of the supplies cost and dollar 30,000 of indirect-labor cost. All other overhead costs would continue. The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of $3.00 is below the $3.30 bid.
[A] Calculate the relevant cost of (a) making & (b) purchasing the component. Which alternative is less costly & by how much?
[B] What qualitative factors might influence decision about whether to make or to purchase the component?