To make a batch of 1,000 units, it is estimated that 120 direct labor hours are required at a cost of $10 per hour. Direct material costs are estimated at $1,500 per batch. The overhead costs are calculated based on an overhead rate of $7.50 per direct labor hour. The item can be readily purchased from a local vendor for $4 per unit.
(a) Should the batch be manufactured or purchased?
(b) What is the break-even value for the overhead rate (dollars per direct labor hour)? Assume that the material costs, labor hours and labor cost do not change.