How much of the fixed overhead must be avoidable

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Question - Mountain Technologies manufactures fiberglass housings for portable generators. One of the parts required to manufacture a house is a metal handle. Currently the company produces all of the metal latches that it requires (120,000 units annually). The company's management is considering purchasing the part from an external vendor, Astex Mechanical. The following data are available for making the decision:

Cost per Unit to Manufactured Buy Direct Material Br. 10.00 Direct Labour 8.50 Variable Overhead 4.50 Fixed Overhead-Applied 7.00 Purchase Price Br. 24.50 Freight Charges. 0.50 Total Cost Br. 30.00 Br. 25.00

Required -

(a) Assuming all of Mountain Technologies' internal production costs are avoidable if it purchases rather than makes the metal handle, what would be the net annual cost advantage to Mountain Technologies of purchasing?

(b) Assume that some of Mountain Technologies' fixed overhead costs could not be avoided if it purchases rather than makes the metal handles. How much of the fixed overhead must be avoidable for the company to be indifferent between making and buying the component?

Reference no: EM132926897

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