Reference no: EM133108516
Question - Leland Manufacturing uses 10 units of Part KJ37 each month in its production of radar equipment. The cost to produce one unit of KJ37 is presented in the table below.
Direct materials $1,000
Materials handling (20% of direct materials cost) 200
Direct labor 8,000
Manufacturing overhead 12,000
Total manufacturing cost $21,200
Materials handling represents the direct variable costs of receiving shipment and is applied to direct materials and purchased materials on the basis of direct cost. This is a separate charge, in addition to the manufacturing overhead. Leland's manufacturing overhead is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable vendors, has offered to supply KJ37 at a unit price of $15,000. The fixed cost of producing KJ37 is the cost of a special piece of equipment that ensures the quality of each part manufactured. This testing equipment is under a long-term, noncancelable lease. If Leland were to purchase Part KJ37, materials handling costs would not be incurred.
Answer the following question: If Leland purchases the KJ37 units from Scott, the capacity Leland was using to manufacture these parts will be idle. Should Leland purchase the parts from Scott?