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Should stoner make or buy component

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Stoner Company uses three different components(materials) in manufacturing its primary product. Stoner manufactures two of the components and purchase one (designated as component 1) from outside suppliers. The Company is currently developing the annual profit plan. Sales are highly seasonal, component 2 can not be acquired from outsider : however Component 3 can be purchased. The three Components have critical specifications.

The annual profit Plan provided data for the following computations :-

Component 3 Unit cost (at 12000 units)

RS. Material (direct) 1.40

Labour (direct) 2.20

Fixed overhead (apportioned) 0.40

Annual machine rental(special machine used only for Component 3) 0.50

Variable factory overhead 1.00

Average cost per year (fixed) 0.40

Total 5.90 Average inventory level 500 units.

The purchase manager investigated outside suppliers and found one that would sign a one year contract to deliver;12,000 top quality units as needed during the year at Rs. 5.20 per unit. Serious consideration is being given to this alternative.

Question 1: Should Stoner make or buy Component 3? Explain the relevant factors influencing your decision.

Reference no: EM132649533

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