McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows.
|
Direct materials
|
$40,000
|
|
Direct labor
|
30,000
|
|
Variable manufacturing overhead
|
25,000
|
|
Fixed manufacturing overhead
|
30,000
|
|
Total costs
|
$125,000
|
An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.
Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Please state clearly whether the part should be made or bought and share your work.