Make or buy Tanner Appliance Company manufacturers 12,000 units of part M-4 annually. The part is used in the production of one of its prinicpal products. The following unit cost information is available on part M4:
Direct material $11
Direct Labor 9
Unit-related support 4
Batch-related support 5
Product-sustaining 2
Facility-sustaining support 2
Allocated corporate support 5
Total costs $38
A potential supplier has offered to manufacture this part for Tanner Appliance for $30 per unit. If Tanner Appliance outsources the production of part M4, 50% of batch related and 80% of product-sustaining activity resources can be eliminated. Furthermore, the production facility now being used to produce this part can be used for a fast-growing new product line that would otherwise require the use of a neighboring facility at a rental cost of $20,000 per year.
a. Should Tanner Appliance purchase part M4 from the outside supplier?
b. What costs are relevant for the decision?
c. What additional factors should Tanner consider?