Problem:
Outsourcing) Mountain Technologies manufactures fiberglass housings for portable generators. One of the parts required to manufacture a housing is a metal latch. Currently the company produces all of the metal latches that it requires (120,000 units annually). The company's management is considering purchasing the part from an external vendor, Austin Mechanical. The following data are available for making the decision:
|
COST PER UNIT TO MANUFACTURE
|
|
|
Direct material
|
$0.40
|
|
|
Direct labor
|
0.34
|
|
|
Variable overhead
|
0.18
|
|
|
Fixed overhead-applied
|
0.28
|
|
|
Total cost
|
$1.20
|
|
|
COST PER UNIT TO BUY
|
|
Purchase price
|
$0.98
|
|
Freight charges
|
0.02
|
|
Total cost
|
$1.00
|
|
|
|
|
a. Assuming all of Mountain Technologies' internal production costs are avoidable if it purchases rather than makes the latch, what would be the net annual cost advantage to Mountain Technologies of purchasing?
b. Assume that some of Mountain Technologies' fixed overhead costs could not be avoided if it purchases rather than makes the latches. How much of the fixed overhead must be avoidable for the company to be indifferent between making and buying the component?