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Should abc company make or buy the component

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Question - BUY OR MAKE Problem

Management of Lotus Company has the task to decide whether to buy a component or produce it. Based on its financial report, it seems it costs the company $90 per unit to make the component. The cost is broken in the following manner

Direct materials per unit 8.00

Direct Labor 25.00

Variable Manufacturing Overhead 22.00

Fixed Manufacturing Overhead per unit 35.00

Company uses 20000 components per year

An outside company, Tom Lee Ltd, made a tender to provide the part at $75.. Some of the managers felt that this may reduce cost and thus that component can be bought from outside and discontinue production of the component.

Buying from Tom Lee company will save $10 of rent cost per unit and Lotus LTD sell the building that was used to produce the component for $42000 . Moreover the salaries of indirect labour of $12000 can be saved.

REQUIRED - Based upon relevant cost differences, should ABC Company make or buy the component. Show the calculation.

Reference no: EM132561778

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