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Konrade engine company manufactures part TE456 used in several of its engine models. Mothly productions cost for 5,000 units are as follows:
Direct material $90,000
Direct labour $45,000
Variable overheads costs $55,000
Fixed overhead costs $100,000
Total costs $290,000
Unit cost $58.00
KEC has the option of purchasing the part from an outside supplier at $50 per unit.
it is estimated that 20% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchase TE456 from the outside supplier. It has also been determined that some space freed up in the manufacturing area could be rented out to outsiders for storage at an anaul fee of $30,000
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