Question: Lindon Company uses 10,000 units of Part Y each year as a component in the assembly of one of its products. The company is presently producing Part Y internally at a total cost of $100,000 as follows.
Direct materials $20,000
Direct labor 40,000
Variable manufacturing overhead 16,000
Fixed manufacturing overhead 24,000
Total costs 100,000
An outside supplier has offered to provide Part Y at a price of $10 per unit. If Lindon stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.
Required: Should Lindon Company make or buy the part? Submit a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.