Problem:
McMullen Co. manufactures automatic door openers. The company uses 15,000 electronic hinges per year as a component in the assembly of the openers. You have been engaged by McMullen to assist with an evaluation of whether the company should continue producing the hinges or purchase them from an outside vendor.
The Accounting Department provided the following detail regarding the annual cost to produce electronic hinges:
Direct Materials $54,000
Direct Labor 60,000
Variable Manufacturing Overhead 36,000
Fixed Manufacturing Overhead 90,000
Total Costs $240,000
The Procurement Department provided the following supplier pricing:
Supplier A price per hinge $11.00
Supplier B price per hinge $10.75
Supplier C price per hinge $10.50
The supplier pricing was obtained in response to a formal request for proposal (RFP). Procurement has determined these suppliers meet McMullen's technical specifications and quality requirements.
If McMullen stops producing the part internally, 10% of the manufacturing overhead would be eliminated.
Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting an outside supplier's offer.