Reference no: EM13748905

Beta needs 10,000 units of a component used in producing one of its products. The latest internal accounting reports show that the per unit manufacturing cost to be $150.00, based on the 10,000 unit production. The manufacturing cost per component broken down into type of cost is as follows: Variable manufacturing costs $110.00 fixed manufacturing overhead $ 40.00 Total manufacturing cost $150.00 Beta recently received an offer from a vendor so that Beta can buy the component for $144.00. If Beta buys the component on the outside 40% of the fixed overhead can be avoided. Observation: Beta's present manufacturing variable cost of $110 goes away if we start purchasing from the vendor. Also, it seems to me that the fixed cost of $40 per unit is based on 10,000 units of production and that if we outsource, some of the fixed cost stays (60%) and some of the fixed cost goes (40%) If the company decides to have the component made by the outside supplier at $144.00, what is the impact on income? Since so much fixed cost stays with us, I'm pretty certain the $144 is a bad deal for Beta. The vendor has initially offered to sell us the part at $144. What price would make Beta indifferent between making the component internally and having the outside supplier make it? Suppose Beta decides to buy from the outside supplier. What is the effect of substituting the market relationship for the management relationship?