Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its…
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Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows:
Direct Materials
$18,000
Direct Labor
20,000
Variable Manufacturing Overhead
12,000
Fixed Manufacturing Overhead
30,000
Total Costs
80,000
An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon stops producing the part internally, one-third of the manufacturing overhead would be eliminated.
Required:
Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.
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