A company is planning to introduce a new portable TV to its existing product line. Management must decide whether to make the TV case or buy it from an outside supplier. The lowest outside price is $100. If the case is produce internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following:
Per Case
Direct materials. $40
Direct labor. 32
Variable overhead. 10
Equipment depreciation. 6.5
Building rental. 10
Allocated fixed overhead.7.5
Total cost.$106
Requird:
1 Determine whether the company should make the cases or buy them from the outside supplier.
2 What decision should be made if only 15,000 cases are needed?
3 What other factors, beside cost, should the company consider?