Currently when the part is being bought from outside, total cost incurred by the
ID: 373878 • Letter: C
Question
Currently when the part is being bought from outside, total cost incurred by the firm for buying from outside = $9.25 / unit x 100,000 units = $925,000
When the part is being made inside, the payment of $925,000 being made to the vendor will no longer be incurred.
Instead this amount can be spent inhose for purchase of material, overhead , raw material etc.
Thus till the point total cost incurred on account of material , overhead , raw material does not exceed $925,000 , it makes sense to make it in hose.
Once the cost exceeds $925,000 , it will not be economical to make it in house.
MAXIMIUM LEVEL OF ADDITIONAL COST WILL BE $925,000 BEFORE THE MOVE CANNOT BE JUSTIFIED ON ECONOMIC BASIS
MAXIMIUM LEVEL OF ADDITIONAL COST WILL BE $925,000 BEFORE THE MOVE CANNOT BE JUSTIFIED ON ECONOMIC BASIS
Explanation / Answer
Currently, this part is being produced by outside vendor at the cost of $9.25 per unit. Your firm buys 100,000 units per year from this ve ndor. Management wants to bring production of this part "in -house". The accounting department adviced that additional costs will have to be incurred when the part is manufactured in-house". These costs are: fixed, labor, factory overhead, raw materials. What is the maximum level of those additional costs (S for all 100,000 unit) before this move cannot be justified on the economic basis?