Discussion:
Iwasaki inc. Is considering wether to continue to make a component or to buy it from an outside supplier. (The outside supplier has offered to sell iwasaki all needed components at a cost of $20 each). The company uses 13000 of the components each year. The unit cost of making the component, according to the companys cost accounting system, is given as follows:
Dm 8.80
Direct labor 5.80
Variable manufacturing overhaead 1.60
Fixed manufacturing overhead 3.60
Unit product cost 19.80
Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minute on the machine that is the companys current constraint. If the component were bought, tis machine time would be freed up for use on one of the companys other products that requires 2 minutes on this machine and has a contribution margin of $5.20 per unit.
What is the difference in cost, in total, between making or buying the component?
What is the maximum amount the company should be willing to pay an outside supplier if the supplier commits to supplying all 13000 parts needed per year?