Armidale Innovations manufactures cars. For 2016, the operations manager, Jack, puts an estimate that the company will need 1,290 steering wheels for its all cars. Jack is evaluating two alternatives: He can either purchase all steering wheels required for 2016 from Tamworth Manufacturing at a price of $1,301 per unit; OR, he can manufacture the required number of steering wheels in-house at the Armidale Innovations own manufacturing plant at the following per unit cost:
Direct materials $499
Direct labour (manufacturing) $249
Variable overhead (manufacturing) $199
Fixed overhead (manufacturing) $349
Total cost (per unit): $1,296
If Armidale Innovations decides to buy all steering wheels from Tamworth Manufacturing, 69% of its currently committed fixed overhead (manufacturing) will not be avoided/eliminated.
Which alternative should Armidale Innovations choose?