Make-or-Buy Decisions
Response to the following problem:
Miller Manufacturing builds and markets personal computers for home and small business use. The company has been approached by an outside supplier offering to provide LCD monitors to the company for $96 each. The company's marketing director negotiated the deal personally and is thrilled about how much cheaper it will be to purchase the monitors from outside. Producing the following cost data, the manager proudly proclaims, "Look, a $22.40 per-unit savings!" Miller Manufacturing currently sells 30,000 LCD monitors along with its personal computer sales.
Per Unit 30,000 Units per Year
Direct materials $ 44.80 $1,344,000
Direct labor 16.00 480,000
Variable manufacturing overhead 4.80 144,000
Fixed manufacturing overhead direct 9.60 288,000
Fixed manufacturing overhead, indirect 43.20 1,296,000
Total cost $118.40 $3,552,000
1. Assuming zero opportunity costs, should the company accept the outside offer?
2. If the monitors are purchased from outside, Miller can produce an alternative product that will contribute $600,000 per year toward covering indirect fixed overhead. Will this affect your decision in part (1)?