Prepare a make-or-buy analysis showing the annual advantage

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Question - McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows.

Direct materials

$40,000

Direct labor

30,000

Variable manufacturing overhead

25,000

Fixed manufacturing overhead

30,000

Total costs

$125,000

An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated.

Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Please state clearly whether the part should be made or bought and share your work.

Reference no: EM132077962

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