Reference no: EM133010204

Question - The Hossain Company is trying to decide whether it should continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier.

The outside supplier has offered to provide the subassemblies for $20.00 each under a five-year contract. Hyatt Company's present costs per unit of producing the subassemblies internally are given below. The costs are based on a current activity level of 30,000 subassemblies per year:

Direct materials $8.00

Direct labour 6.40

Variable overhead 3.25

Fixed overhead 5.80

Total cost per unit $23.45

The fixed overhead is further broken down into the following components:

Depreciation $66,000

Supervisor Salary $37,500

General Overhead. $70,500

If Hossain accepts the supplier offer, the Supervisor Salary can be eliminated. The other Fixed overhead would not be affected by this decision.

If Hossain decides to discontinue production of the subassembly, the space now being used to produce the subassemblies could be rented out to another manufacturer for $25,000 per year.

Required - Should Hossain make or buy the subassemblies?