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Stinson Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A $100 cost per unit to manufacture 4,000 units was determined as follows:
Direct material: 15
Direct labor: 40
Variable manufacturing overhead: 10
Fixed manufacturing overhead: 35
Total: 100
Garvin Inc. has proposed to sell the component to Stinson for $95 per unit. If the component is obtained from Garvin, Stinson's unused production facilities could be rented to another company for $50,000 per year. In addition, $10 of the $35 in fixed manufacturing overhead could be avoided.
REQUIRED:
Question 1: Indicate if Stinson should make or buy the component and the total dollar difference in favor of that alternative.
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