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Question
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 produced 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.......................................................... .............................................. $ 40.00
Direct labor.......................................................... ............................................... 32.00
Variable overhead.......................................................... ............................................... 10.00
Equipment depreciation.......................................................... ............................................... 6.50
Building rental .......................................................... ............................................... 10.00
Allocated fixed overhead.......................................................... .............................................. 7.50
Total cost.......................................................... ............................................. $106.00
Required:
(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, besides cost, should the company consider?
Answer
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Related questions
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