Junior Company currently buys 30,000 units of a part used to manufacture its pro

Question

Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):
Direct materials $16
Direct labor $12
Variable overhead $12
Fixed overhead $10
Total $50

If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.

Which alternative (internal production or external purchase) is more cost effective?
And by how much (using relevant amounts only)?

Explanation / Answer

cost if purchased from outside supplier=30000*40=$1200000 variable cost=12+12+16=40 cost if manufacture=(30000*40)+100000=$1300000 external purchase is more cost effective.it saves cost of 100000

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