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.
Q1. What amount of the MNO production costs is avoidable? (five points)
Q2. Should the company outsource MNO? Why or why not? (five points)
Q3. What other items should the company consider before outsourcing any of the parts it manufactures? (five points)