Question

You are up for promotion to Plant Manager. All candidates for the position have been given information related to the production of the company’s premier product, Extreme Slime.  

Data:

A component used in the production of Extreme Slime is being evaluated to see if the part should be made in house, or purchased from an outside supplier. The outside supplier has said the purchase price would be $68 and $6 for shipping each part. We will need 10,000 of these parts in the next year. If the part is made in house, a manager will be hired at an annual salary of $40,000 to oversee this area of production. It is estimated that the costs to manufacture the part will be:

Direct materials                                              $34

Direct labor                                                      $24

Variable manufacturing overhead              $12

Fixed manufacturing overhead                    $10 (including the manager’s salary per unit)

Total unit cost                                                 $80

Answer 1

If Purchased from outside
No. of Units required	10000
Cost if purchased from outside	74
Total Cost	740000
If part is made in house
Direct Material	34
Direct Labour	24
Variable Manufacturing Overhead	12
	70
Manager's Salary	4
Cost per unit	74

At the production capacity of 10000 units, the organisation may take any decision as the cost is same in both cases, however if the number of units required increases, then it will be better to produce it in house as the manager's salary will be distributed in higher units thereby reducing the per unit cost.