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.