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The estimated costs of producing 6,000 units of a component are:
Per Unit
Direct Material $10
Direct Labor 8
Applied Variable Factory Overhead 9
Applied Fixed Factory Overhead 12
$1.5 per direct labor dollar
The same component can be purchased from market at a price of $29 per unit. If the component is purchased from market, 25% of the fixed factory overhead will be saved.
Required:
Problem a. Should the component be purchased from the market?
Problem b. Being a production manager, provide your logical opinion on choosing between purchasing the component from market or producing in-house.
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