Problem
Cardinal Company needs 20,000 units of a certain part to use in its production cycle. The following information is available:
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Cost of cardinal to make the part:
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Direct materials
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$4
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Direct labor
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17
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Variable overhead
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7
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Fixed overhead
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10
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$38
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Cost to buy the part from the Oriole company
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$42
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If Cardinal buys the part from Oriole instead of making it, Cardinal could not use the released facilities in another manufacturing activity. Sixty percent of the fixed overhead applied will continue, regardless of what decision is made.
What do you advise to the firm managers: shall the firm buy or make the product?