ABC Company has been producing its own widgets that are used in manufacturing its final product. The cost of manufacturing 10,000 widgets is summarized below.
Direct materials
$20,000
Direct labor
16,000
Variable factory overhead
9,000
Fixed factory overhead
15,000
Total manufacturing costs
$60,000
A supplier offers to produce the widgets that ABC needs for $5.30 plus freight costs of $0.50 per widget. If the company decides to buy from the supplier, 60% of the fixed factory overhead which represents depreciation and insurance costs will still continue. 40% will be avoided.
a.) Should the company continue to make the widget or purchase it from the outside supplier?
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