Reference no: EM132895132
Question - Suppose a Ford executive is trying to decide whether the company should continue to manufacture an engine component or purchase it from a small local manufacturing company for $50 each. Demand for the coming year is expected to be 200,000 units, the same as for the current year. Ford has the following data for its current year:
Direct material $5,000,000
Direct labor $1,900,000
Factory overhead $4,000,000
-25% of the factory overhead is considered variable. Assume that the variable overhead varies with output volume.
-If Ford continues making the components next year their unit costs for direct materials will increase by 10%.
-If Ford buys the components, 30% of the fixed costs will be avoided. The other 70% will continue regardless of whether the components are manufactured or purchased.
Should the company continue making the component next year, or should it start buying the component next year? Make sure to back up your recommendation with cost calculations.
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